Results

Broadly Inline: 1QFY15 core profit increased 134% yoy and made up of 22% and 23% of HLIB and consensus full-year estimates, respectively.

Deviations

We expect stronger quarter earnings ahead arising from improvement in drilling, fabrication and OCSS segments.

Dividends

Declared interim dividend of 1.35 sen/share and special dividend of 1 sen/share.

Highlights

Excluding one-off gain of RM178m arising from the acquisition of Newfield business, 1QFY15 core profit surged 134% yoy due to inclusion of tender rig and Newfield assets. Revenue from OCSS and FAB fell yoy following the completion of projects and slowdown in fabrication jobs.

Drilling division also fell qoq mainly due to lower utilisation from West Menang tender rig which was out of services for 70 days caused by a fire incident. However, we expect the drilling division to improve going forward as West Menang rig is already back in operations coupled with new drilling contract win recently.

In the meantime, SK Petro has just secured 2 EPCIC contracts worth US$415m or RM1.3bn in North Malay Basin and JDA. The EPCIC contract duration for North Malay Basin and JDA are 25 months and 39 months respectively. The latest orderbook stood at RM30bn after these contracts wins. Some local CPPs contracts are expected to be announced in 4Q14 instead of 2Q-3Q14 previously.

The recent share price weakness was partly attributed to the concern of potential removal from Syariah compliant list in the Nov 14 review. We understand there are only circa 1% of outstanding shares held by syariah funds which should ease investor concern on the potential sell off in the event of removal from Syariah compliant list.

We believe the market has underappreciated the potential value from recent acquisition of Newfield’s asset. The company has made four significant gas discoveries in the SK408 gas field, offshore Sarawak recently. Potential inking of gas sales agreement will upgrade the 2C reserves to 2P reserves. As for the SK310 and SK410 gas fields, production would start in 2016 and 2017 respectively with significant development cost of around US$727m over 2-5 years in order to monetise the asset.

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 RM5.52 based on unchanged 20x FY01/16 EPS of 27.6 sen/share.

Source: Hong Leong Investment Bank Research - 20 Jun 2014