News

SapuraKencana announced that Sapura Navegacao Maritima S.A. Brazil, a 50:50 JV between SapuraKencana and Seadrill has been awarded contracts from Petrobras to charter and operate three units of pipe laying support vessels (PLSV).

The contract value is approximately US$2.7bn (RM8.59bn).

The contracts are for a period of 8 years with extension option for additional eight years and are expected to commence by 2Q16 and only expected to contribute to earnings from FY01/17 onwards.

Comment

We view the contract award positively and reaffirms our view that SapuraKencana is a proxy to global growth in offshore O&G production. It is a sizable order and has increased the total orderbook by 48% to RM26.6bn. However, we note that the contract will spread over 8 years and only starts contribute to FY01/17. This translates to RM1bn revenue per annum and further increase the earning visibility to FY2024.

The contract translates to charter rate of US$310k/ day for a vessel. This is the second contract SapuraKencana won after securing a US$1.4bn contract from Petrobras in Nov11.

We understand the three 500-600 tonnes PLSV will be constructed outside of Brazil and cost around ~RM800m to RM1bn per vessel (which will be jointly funded with Seadrill).

We believe the partnership with power house Seadrill is a major catalyst which will drive growth going forward.

In addition, we believe SapuraKencana and its partner has a good chance to secure the US$1.5bn Sepat front end engineering and design (FEED) contract from Petronas.

We also believe the market is undervaluing the potential of the drilling segment in Malaysia which is underpinned by massive drilling activities (~22 rigs operating in 2012 and expect to rise to 38 by end 2013) as detailed in our report titled ‘Drilling Tsunami’ dated 05 June 2013. As the world’s largest tender rig operator, SapuraKencana is one of the top picks in the drilling sector. We also like Perisai (BUY) and Scomi Energy (BUY) for the related play in drilling segment.

Risks

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

Forecasts

Maintained.

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 an unchanged TP of RM4.74 based on 20x EPS of 23.7 sen/share based on FY01/15 EPS.

Source: Hong Leong Investment Bank Research - 28 Jun 2013