- We maintain our BUY recommendation on SapuraKencana Petroleum (SapuraKencana), with an unchanged fair value of RM3.70/share – based on an FY14F PE of 22x, which is the 2007 peak achieved by Kencana Petroleum.

- RAM Ratings has reaffirmed SapuraKencana’s AA3 rating for its RM700mil Sukuk Mudharabah Programme (2011/2026) with a stable outlook. The rating agency indicated that the group’s balance sheet and cashflow protection metrics are modest relative to its current rating.

- With the additional RM6bil additional debt to fund its acquisition of Seadrill’s tender rigs, RAM estimated that SapuraKencana’s borrowings could double to around RM12billion, with its gearing ratio elevated to between 1x and 1.2x over the next 2 years, from 0.9x in FY13, before tapering off.

- This reaffirms our unchanged view (See report dated 3 January this year) that SapuraKencana’s net gearing is unlikely to rise significantly above 1.2x given the group’s net profit of RM1.2bil-RM1.3bil annually. But our computation includes fresh debt that could be undertaken for additional 3 flexible pipe-laying support vessels (PLSV), which could cost US$300mil each, for Petrobras’ pre-salt basin fields.

- As the group’s equity contribution for the new PLSVs may amount to only RM93mil annually over the 3-year construction period, assuming a 20:80 debt-to-equity financing for the 50:50 JV with Seadrill, we reiterate our view that another equityraising exercise may not be required over the next 1-2 years following the current placement proposal.

- Recall that the group had slightly revised its proposed US$2.9bil acquisition of Seadrill’s tender-assisted rigs (TAG) with a 587 million new share placement at a slightly higher RM2.80/share to investors, replacing the earlier plan to issue US$238mil of 3-year redeemable exchangeable preference shares (REPS) which had an exchange price of RM2.70/unit to Seadrill and 300mil new additional placement shares.

- All in, we are projecting the group’s FY14F EPS to accelerate by 58% due to the acquisition of Seadrill’s assets (which offer a highly value-accretive PE of 3x) and full-year accounting for the merger between SapuraCrest and Kencana Petroleum.

- Hence, with the sector’s largest order book of RM18bil (including Seadrill’s TAGs), SapuraKencana remains our top pick for the oil & gas industry.

- Valuation remains attractive at the current FY14F PE of 18x, which is at a 22% discount to Kencana Petroleum’s peak in 2007.

Source: AmeSecurities