Highlights

SapuraKencana’s 1QFY14 conference call was hosted by Ms Chow Mei Mei, Senior VP of Corporate Strategy and Planning, Mr Tengku Muhammad Taufik, Group CFO and Ms Nor Hafifah Mohd Puzi, Manager of Corporate Strategy and Planning following the release of results on last Friday.

QoQ: Lower revenue in Fab & HUC was mainly due to delay in commencement of certain projects by principle. However, we are not overly concern as this is just a matter of timing and earnings will eventually flow through. Lower EJV and DGMS were caused by maintaining and drydocking on certain rigs. The company is ready to pursue more complex EPCIC projects. In Malaysia, the company is eyeing another marginal field contract, T&I contract under Pan Malaysia as well as central processing platform contracts (range from US$0.8-1.5bn).

Of three PLSVs under the US$1.4bn contract awarded by Petrobas, 2 are being built in Netherlands with IHC Caland are on track to delivery while another one in Brazil lagged behind schedule by 4-6 months. However, management has included the estimated cost arising from late delivery into the contract value. Expect one PLSV to operate in mid-14 and another one by end of 2014.

Comments

We came away from the briefing more positive on SapuraKencana’s prospects especially on the tender rig business which is underpinned by massive drilling activities. We maintain our view that SapuraKencana is a proxy to global growth in offshore O&G capex spending.

1QFY14 result has not included the contribution from the Seadrill’s tender rig which will only consolidate into to group from 2QFY14 onwards. This will accelerate earnings growth.

After securing the US$2.7bn contract from Petrobas, SapuraKencana’s orderbook stood at US$26bn as of 28 June 2013. 49% of orderbook from Brazil, 30% from Malaysia and the rest from South East Asia, Australia and others. We also understand the current tenderbook size is almost similar to existing orderbook. 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. If won, it will improve the utilisation rate at Lumut yard from the current 55%.

Risks

Execution risk, escalation of vessel and fabrication costs.

Forecasts

Unchanged.

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 - 2 Jul 2013