Results   

Slightly below expectation: 1HFY15 core profit increased  64% yoy  and  made  up  of  45%  and  47%  of  HLIB  and  consensus full-year  estimates, respectively.  

Deviations 

Mainly  due  to  weaker  fabrication  business  and  slower activities from  drilling  division.

Highlights 

Excluding  reversal  provision  of  RM63m  due  to  better performance  from its older rigs  and  one-off gain  of  RM178m arising  from  Newfield acquisition,  1HFY15 core profit  surged 64%  yoy  due to inclusion of  Newfield assets  but  partly offset by slowdown  in  the FAB and HUC  segments.

Drilling  division  fell  qoq  as  few  rigs  are  out  of  job  due  to contract  expiration.  We  understand  that  drilling  business  will be  flat  QoQ  in  3Q  and  expect  to  perform  better  in  4Q. Associate  earnings  fell  64%  YoY  mainly  due  to  lower contribution  from SapuraAcergy as  work  on  Gumusut Kakap has  completed.  However,  we  ex pect  contribution  from associate to gradually pick up due to ramp up operation from Petrobras  job.  We  understand  Sapura  Diamante  PLSV  has started  operation  in  Jun  14  while  Sapura  Topazio  was  just delivered to Brazil and  is  expected  to commence operation  in Oct  14.

Latest  orderbook  stood  at  RM26.8bn  with  majority  from OCSS division  -  62%, drilling  –  19%, EJV  –  10% and FAB  & HUC  –  9%.  In  term  of  ge ographic  breakdown,  Brazil  remain the  main  area  comprise  about  47%  of  orderbook  while Malaysia at about 31%.

After the five well discoveries in SK408 field, both SK310 and SK408  now  have  combined  Gas  Initially  In  Place  (GIIP)  of 6tcf.  We  believe  the  market  has  underappreciated  the potential  value  from  recent  acquisition  of  Newfield’s  asset. Potential  inking  of  gas  sales  agreement  will  upgrade  the  2C reserves  to  2P  res erves .  T he  SK310  and  SK408  gas  fields are  expected  to  start  production  in  2017  and  2018, respectively  with  significant  development  cost  of  around US$727m  over  2-5 years in order  to monetise the asset.  

SapuraKencana  is  likely  to  be  remove d  from  SC’s  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  about  the  potential  sell off  in the event  of removal.

Risks 

Execution risk, escalation of vessel  and fabrication  costs.

Forecasts 

FY15  and  FY16  earnings  are  reduced  by  9%  and  3% respectively  after  factored  in  lower  job  done  for  fabrication and drilling divisions.

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  reduced  from  RM5.52  to  RM5.32 based  on  unc hanged  20x  FY01/16  EPS  of  26.6  sen/share posted earnings  changed.

Source: Hong Leong Investment Bank Research - 26 Sep 2014