Results

Broadly in line: 1HFY14 Core profit made up of 41% of HLIB and consensus full-year estimates, respectively.

Deviations

We expect stronger contribution in 2HFY14 due to contribution from the Berantai marginal field.

Highlights

For 2Q, YoY revenue rose 21% due to the inclusion of financial results from Seadrill tender rig business. Offshore construction and subsea servies (OCSS) segment fell 13.4% yoy mainly due lower revenue contribution from SapuraClough with the completion of Domgas project in 2QFY14, while FAB & HUC revenue increased by 3.7% yoy due to increased activities of certain hook–up commissioning work with higher progress of fabrication projects. Fabrication job expects to see increasing activities toward year end.

PBT margin for FAB & HUC has fallen from 18% in 2Q13 to 8% in 2Q14 primarily due to lower recognition of profit as some of the projects are at early stage of their progress as well as increase competition from local and foreign players. Management expects margin pressure to continue in nearterm due to stiff competition. In mid to long term, more value add services will be introduced with increasing yard automation to help maintain the margin. Berantai project is progressing well and expect to contribute by 2HFY14. We understand the company has put in bid for 2 RSC contracts which if successful will boost their energy revenue.

SapuraKencana’s orderbook stood at RM25bn with 51% of orderbook from Brazil, 24% from Malaysia and the rest from South East Asia, Australia and others. Current tenderbook size is estimated to be similar to outstanding orderbook.

SapuraKencana has launched its first pipe laying vessel, Sapura Diamante last Friday. The Sapura Diamante, builds by IHC Merwede, is capable of operating in depths of up to 2,500m and is suitable for worldwide operation. The second vessel is expected to be delivered by 2Q2014. Petrobras’ executive manager of E&P Service, Christina Lucia said the vessel was part of an important fleet of PLSVs in Brazil and vital to the country’s target of achieving 4bn barrels of oil per day in 2020. This should help to ease investors’ concern on Petrobras’ payment ability to SapuraKencana. For near term catalyst, 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.

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 - 1 Oct 2013