Results

Broadly in line: 1QFY14 Core profit made up of 14% of HLIB and consensus full-year estimates, respectively.

Deviations

We expect a stronger contribution from the consecutive quarters due to the integration of the tender rig business from 2QFY14 onwards.

Highlights

YoY revenue rose 138% due to the inclusion of Kencana’s business post-merger, a stronger contribution from Offshore Construction & Subsea Services (OCSS) and maiden contributions from the Berantai marginal field (commencement of gas production on 20 Oct 12). Higher contribution in OCSS segment was due to a higher scope of works for Pan Malaysia contracts. QoQ revenue fell 17% due to lower contribution from Fab & HUC divisions.

The acquisition of Seadrill’s tender rigs business was completed on 30 Apr 2013 and will start to consolidate to group earnings from 2QFY14 onwards. This is faster than we expected as we conservatively assumed deal completion in Jul 2013. We understand that there maybe a one-off cost in 1QFY14 arising from the merger with Seadrill’s tender rigs, but the quantum is uncertain at this juncture pending an analyst briefing on Monday.

To recap, SapuraKencana just won a US$2.7bn contract from Petrobas on 27 June 2013 and has increased the total orderbook by 48% to RM26.6bn. 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. 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 and fabrication costs.

Forecasts

Maintained pending a company briefing on Monday.

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 FY01/15 EPS of 23.7 sen/share.

Source: Hong Leong Investment Bank Research - 1 Jul 2013