- We maintain our BUY recommendation on SapuraKencana Petroleum (SapuraKencana) with an unchanged fair value of RM5.70/share, based on an FY16F PE of 22x, which is the 2007 peak achieved by Kencana Petroleum.

- We have fine-tuned SapuraKencana’s core FY15F-FY17F net profit as its 1HFY15 core net profit of RM694mil (excluding pre-acquisition Newfield contributions of RM178mil and drilling provision write-back of RM64mil) was largely within our and consensus expectations –accounting for 50% of our earlier FY15F estimate and 48% of street’s RM1,440mil.

- We expect the group’s 2HFY15 earnings to be slightly stronger as the weaker offshore construction activities during the year-end monsoon season is likely to be offset by maiden contributions from the group’s 50%-owned pipelay support vessel, Sapura Diamante, which has started operations since June this year coupled with SapuraKencana’s more geographically diverse earnings base arising from its acquisition of Seadrill’s tender rigs.

- Excluding exceptional pre-acquisition items arising from Newfield assets, which was finalised on 11 February 2014 and provision write-back, SapuraKencana’s 1QFY15 core net profit of RM369mil rose by 8% QoQ largely due to higher activities in the offshore construction division.

- This was partly offset by lower lumpy contributions from the group’s production assets and decreased drilling earnings due to the loss of income from 3 idle tender rigs –T9, T10, and Teknik Berkat. T9 and T10 are old rigs that are expected to be replaced by newer rigs scheduled for completion this year.

- On a YoY comparison, SapuraKencana’s 1HFY15 earnings surged by 69%, propelled by the Seadrill tender rig acquisition in April 2013 and the maiden contribution of the Newfield assets.

- Since the beginning of 2014, the group has secured RM6.5bil in new contract awards, of which 73% stems from tender rig charters. Including the recent drilling charter awards, the group’s order book has dipped QoQ to RM26.8bil (2.4x of FY15F revenue), which is still thelargest within the O&G sector and above Bumi Armada’s firm orders of RM22.7bil.

- We remain positive on the group’s order book accretion and it remains on the prowl for fresh tenders of RM27bil, as bids for Malaysia’s prolific central processing platform projects could materialise towards the end of the year.

- The stock still trades at an attractive FY16F PE of 15x currently – half of SapuraCrest Petroleum’s peak of 29x back in 2007.

Source: AmeSecurities