-  We maintain our BUY recommendation on SapuraKencana Petroleum (SapuraKencana), with an unchanged fair value of RM4.65/share – based on an FY15 PE of 22x, which is the 2007 peak achieved by Kencana Petroleum.

-  SapuraKencana’s 1QFY14 net profit of RM94mil came in below expectations, accounting for only 9% of our earlier FY14 forecast of RM995mil and consensus estimate of RM1,017mil. Hence, we have cut the group’s FY14F net profit by 5% largely due to a RM45mil non-recurring forex loss, arising largely from timing differences on the completion of Seadrill’s tender rigs.

-  But we maintain FY15F-FY16F earnings on anticipation that the completion of the acquisition of Seadrill’s tender rigs will propel SapuraKencana’s earnings momentum further. Hence, we have not changed our fair value.

-  The group’s 1QFY14 net profit fell 24% QoQ to RM94mil largely due to the foreign exchange loss, 23% decline in its energy/joint-ventures division due to the drydocking of a tender rig, 11%-point increase in effective tax rate to 18% and seasonally lower fabrication/hook-up commissioning contributions. Excluding forex losses, the group’s earnings would have instead increased by 15% QoQ to RM143mil.

-  On a YoY comparison, SapuraKencana’s 1QFY14 earnings surged 2.2x as the merger of SapuraCrest and Kencana Petroleum was completed in May last year. But this does not include any contributions from the Seadrill tender rig acquisitions as the deal was only completed on 30 April 2013.

-  The recent US$2.7bil Petrobras charter for 3 more flexible pipelay vessels, which will be built outside Brazil, has caused the group’s order book to surge 45% to an estimated RM26bil or 3.5x FY14F revenues. The group’s massive order book remains the largest amongst the O&G sector and is now double its nearest peer Bumi Armada, which has outstanding charters/contracts valued at RM12bil.

-  The larger prospective domestic contracts that the group is expecting include the over RM1bil Semarang central processing platform (CPP), which may be awarded soon. But this is only one of 10 such CPPs that the group is eyeing. Additionally, the group is also actively looking at acquiring some of the large production blocks of US-based Newfield Exploration Co, which has indicated its intention to dispose its non-US based assets. If successful, this will further integrate SapuraKencana’s upstream operations to become a more exciting and formidable player in the sector.

-  SapuraKencana remains our top pick for the oil & gas industry. Valuation remains attractive at the current FY15F PE of 19x, which is at a 13% discount to Kencana Petroleum’s peak in 2007. 

Source: AmeSecurities