Highlights

The results briefing was well attended by both buy and sell side analysts and general sentiment towards the company’s results and prospects was positive. Dato' Seri Shahril highlighted the smooth merger as one of the foundations for performance and the company’s emergence as a full field developer.

An EGM for the final approval for the Seadrill acquisition is planned for 23 April. Deal completion is expected within 10 days of the EGM, resulting in a 6 month contribution from the Seadrill Tender Rigs this year and the full affect in FY14. There has been no problem in people crossover and management expects a seamless transfer of drilling talent and knowledge. Management seemed more upbeat on the prospects for the Tender rig business citing Gulf of Mexico and Brazil as potential markets. The Seadrill world wide office network will give the company a global presents. The company continues to be optimistic on a 3 pipe lay vessel bid in Brazil, which if secured would be a rerating catalyst.

Comment

We came away from the briefing more upbeat on SapuraKencana’s prospects and feeling that our forecasts are conservative. Dato' Seri Shahril’s comments on smooth integration and position as a full field developer underline our view that the company’s occupation of the whole offshore value chain is a significant competitive advantage.

We believe there is still ample upside to our Daily charter rate (DCR) assumptions of US$131k and hence our forecasts and price targets. Using 300+ Jackup rig DCR as a proxy, there is still a 60% upside before rates reach the peak. Conservatively holding margins constant, a 10% increase in DCR gives a 5.4% increase in EPS, while a 1% improvement in PBT margins gives a 1.4% increase in EPS. At 30% PBT drilling margins, a 10% increase on our DCR assumptions to US$144k (currently rates are US$135k), utilisation increased from 80 to 85% (inline with our domestic assumptions) our TP would be boosted to RM3.85 (7% higher) based on unchanged 20x average FY01/14 and FY01/15 multiples.

Risks

• Execution risk, Escalation of vessel and fabrication costs.
• Seadrill deal abortion.

Forecasts

FY14 – FY15 Largely unchanged and introduce FY16.

Rating

BUY

• Positives –
  • Strong balance sheet and knowhow, Global trend towards offshore production.
• Negatives –
  • Increased competition for growth markets, Complexities of running a larger organization.

Valuation

• Maintain BUY call and TP of RM3.60 based on unchanged 20x average FY01/14 and FY01/15 EPS of 18 sen/share to better reflect earnings prospect of the Seadrill acquisition as we assumed that earnings from the deal will only flow through from mid FY01/14.

Source: Hong Leong Investment Bank Research - 25 Mar 2013