Stock Name: SAPCRES
Company Name: SAPURACREST PETROLEUM BHD
Research House: MAYBANK

SapuraCrest Petroleum Bhd (SapCrest)
(Dec 13, RM2.89)
Maintain buy at RM2.85 with revised target price of RM3.30 (from RM3.05): 3Q results yielded no surprises but we are turning even more positive on SapCrest. It has a strengthened balance sheet to expand its core businesses (ie IPF, marine services, drilling operations) through M&As. Maintain buy with a higher RM3.30 target price (+8%) as we lift target PER multiple from 16 times to 17 times FY13 on new asset injection prospects.

3QFY net profit of RM55 million (+3% quarter-on-quarter, +3% year-on-year) took 9M earnings to RM159 million (+21% y-o-y), on track to meet our and consensus full-year forecasts of RM216 million to RM218 million. No dividend was declared in the quarter. SapCrest remained cash rich for the fourth consecutive quarter with net cash level of RM76 million as at October.

The IPF division was the key performer in 3Q. Pretax profit jumped 123% quarter-on-quarter (q-o-q) to RM83 million, driven primarily by higher contribution from transportation and installation (T&I) projects. Other divisions disappointed. Drilling division's pretax profit fell 21% q-o-q to RM79 million on higher dry-dock costs and lower utilisation. Marine services pretax losses swelled nine times q-o-q; 2 times y-o-y to RM39 million whilst operations and maintenance (O&M) turned into a pretax loss of RM1 million (2Q: +RM1 million).

No change to our forecasts. Its balance sheet allows SapCrest the opportunity to gear up and build its asset base. Marine services division is an area which SapCrest can strengthen ' through M&A or newbuild (or secondary) routes. We also do not rule out SapCrest growing its rigs and pipe-lay vessels through JV with its existing partners (ie Seadrill, Acergy).

Petra Perdana and Alam Maritim are touted as potential acquiree targets. Hypothetically, taking over 100% of any of these companies would cost SapCrest between RM389 million and RM687 million (based on Friday's closing price) and could add RM53 million to RM61 million (+22-25%) to its FY13 net profit (full-year impact); after netting off 7% interest cost.

Pricing will be a key issue for the existing owners to exit. Acquiring Petra could be a less expensive option at Petra's current market value of RM389 million. An asset-liability option may be easier as major owners/shareholders hold just a collective 14%. ' Maybank IB Research, Dec 13


This article appeared in The Edge Financial Daily, December 14, 2010.