News

SapuraKencana (SK) announced that Bursa Securities has approved the listing of the 400m Consideration Shares issued to Seadrill as part payment their USD2.9bn tender rig business at a price of RM2.80 / share.

The deal is also on target to be complete on or before our assumed deadline of mid-13 with an EGM in mid April.

Comment

We are positive on the news. The share price is higher than the RM2.70 we first anticipated, hence lower dilution. Following the placement of 587 shares at RM2.80, the RM1.2bn remaining consideration will be financed by 60:40 debt equity and not 50:50, less equity than we anticipated, resulting in a smaller share base and 6% to 10% higher EPS from our conservative assumptions. We also understand appetite for the placement was strong despite the looming election and placement was made to value investors.

In addition, we like the fact that Seadrill is maintaining a strategic stake and therefore skin in the game. Drilling knowledge and talent transfer has been smooth and we expect this to continue. We believe the partnership with power house Seadrill is a major catalyst which will drive growth going forward. The potential win of 3 pipelay barge contracts in Brazil is one example of many we expect going forward, as this duet enjoy the offshore O&G cyclical upswing.

Perceived political connection is holding back price. Our house election base case is for BN to win the election, as detailed in our 2013 market outlook. However, as with any election period, perceived politically risk on Sapura Kencana may result in share price weakness. Dips and emotional selling are a chance to accumulate and build sizeable position further in a company with excellent track record on execution and ability to secure contracts. Moreover, the partnership with Seadrill is a rear strength to ignore.

Risks

• Execution risk,
• Escalation of vessel, fabrication and drilling costs.
• Deal abortion

Forecasts

FY14, and 15 EPS increased 6% and 10%.

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 with a higher TP of RM3.94 based on 20x EPS of 19.7 sen/share based on an average of FY01/14 and FY01/15 EPS.

Source: Hong Leong Investment Bank Research - 05 Apr 2013