News

SapuraKencana announced that its wholly-owned subsidiary, Kencana HL Sdn Bhd has received a letter of awards from Trans Thai-Malaysia Sdn Bhd for the provision of engineering, procurement, construction, installation and commissioning (EPCIC) of JDA Gas Balancing Evacuation project.

The contract value is approximately US$180.7m (RM576m).

The contracts are for a period of 3 years and the works is expected to commence in 2Q13 and scheduled to be completed by 1Q16.

Comment

We view the contract award positively and reaffirms our view that SapuraKencana is a proxy to global growth in offshore O&G production. The contract won increased the fabrication orderbook by 38% to RM2bn but only increased the total group orderbook by 2% to RM26.6bn. The contract period is 3 years and this translates to RM192m revenue per annum.

The contract makes up 4.6%, 5.6% and 5.8% of our replenishment assumptions for FY14, FY15 and FY16 respectively, largely in line.

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) for the related play in drilling segment.

Risk

• 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 - 10 Jul 2013