Highlights

We understand that 4QFY14 recorded a one off transaction cost of RM135m for the acquisition of Seadrill’s tender rig business and Newfield asset in Malaysia. Excluded the cost, FY14 Core PBT is at RM1.21bn (vs HLIB & consensus forecast of RM1.27bn).

After the acquisition of Newfield’s asset, SapuraKencana is able to provide almost all services across the O&G Upstream supply chain. Cross selling products (or bundle services will be the trend) will help further grow the group going forward.

Despite weak quarter revenue from fabrication segment, management shared that the tender newflows on fabrication job is picking up. The company is bidding for 12 fabrication contracts with a few more tenders to submit in April and May 14. Most of the results for the tenders are scheduled for Jun- July 14.

Drilling and Energy Services registered strong performance as PBT surged from RM93m to RM435 in 4QFY14 after inclusion of revenue from tender rig business and full quarter contribution from Berantai marginal field (~RM77m).

The company had secured an RM16.5bn refinancing loan with 75% in US dollar. We understand that the refinancing rate is very competitive.

Comments

We came away from the briefing positive on SapuraKencana’s prospects given its ability to provide integrated services with growth opportunity coming from product cross selling and oversea expansion. We maintain our view that SapuraKencana is a proxy to global growth in offshore O&G capex spending.

In line with our expectation, fabrication contract flow is expected to increase going forward and we estimated more than RM10bn worth of potential contract to be awarded. Several centralized processing platforms (CPPs) are likely to be awarded in 2014 such as Semarang, Bokur, Dulang, Guntong Baram Delta and Sepat. On the OCSS segment, we expect revenue to pick up in 2H14 due to the contribution from Pan Malaysia package C&D. We understand that most of the vessels have already secured works in FY15.

We believe the recent acquisition of Newfield’s asset will help SapuraKencana to diversify its portfolio of business and gain immediate foothold and recognition as an upstream resource owner and operator. To note, there will be upside to the current 2P reserves of 36m given the huge estimation of GIIP for SK310 and SK408 gas fields.

Risks

Execution risk, escalation of vessel and fabrication costs.

Forecasts

FY14 and FY15 earnings raised by 8% and 12% respectively after include the contribution from Newfield business.

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 TP raised from RM4.92 to RM5.52 based on unchanged 20x FY01/16 EPS of 27.6 sen/share.

Source: Hong Leong Investment Bank Research- 26 Mar 2014