- We maintain BUY on SapuraKencana Petroleum with a lower fair value of RM2.45/share (from RM2.70/share previously), following an 8%-10% cut in our FY16F-18F as we account for a weaker energy segment and lower utilisation of the tender rigs.

- For the quarter, the group incurred impairment charges on the oil and gas assets of RM540mil due to lower expectations of crude oil prices, which was partially offset by RM195mil of deferred tax liabilities released and net foreign exchange gain of RM109mil. Excluding the one-off items, 1HFY16 core net profit of RM600mil accounted for 51% of our estimates, but 57% of consensus.

- SapuraKencana’s 1HFY16 core net profit declined by 13% YoY, mainly due to a 64% decline in PBT for the energy division (excluding one-off items) as a direct result of lower crude oil prices, where average realised price for the period was USD62/barrel. Domestic engineering and construction (E&C) also recorded 35% lower PBT due to slower contract flows in the market.

- However, this was offset by stronger international E&C following the execution and securing of more contracts. Drilling segment’s PBT also improved by 32% with the commencement of new rigs. Despite pressure on the rigs market, SapuraKencana managed to post higher margins of 27% for the segment vs. 20% previously, due to its optimisation of operational costs.

- Nevertheless, we note that the drilling segment could face pressure as four of its rigs are currently stacked. SapuraKencana expects one of the stacked rigs to be awarded a contract by the end of the year, with another three contracts next year. Additionally, five of its existing contracts will be expiring over the next two years.

- SapuraKencana is currently negotiating the gas sales agreement with Petronas and will be able to monetise its substantial gas reserves once it is concluded (expected by end of 2016). The development concept has been finalised for the SK310 block, and is expected to commence development this year with first gas targeted for the second quarter of 2017. A capex of USD300mil will be incurred on a gross basis for this development, which includes a wellhead platform, pipelines, and drilling costs.

- The group’s order book dipped QoQ to RM23bil, with international E&C comprising 64% of the total. The stock currently trades at an FY16F PE of 10x, which is more than one standard deviation below its historical average.

Source: AmeSecurities Research - 18 Sep 2015