Results

• Broadly Inline: 1QFY16 core PAT increased 29% QoQ but fell 25% YoY which made up 23% of HLIB and consensus fullyear estimates, respectively.

Deviations

• None.

Highlights

• 1QFY15 revenue fell 7.6% YoY mainly due to lower contribution from energy division arising from lower oil price coupled with lower jobs flow for engineering and construction but partly offset by higher contribution from drilling.

• Despite lower selling price of crude oil, energy division remain profitable with PBT margin of 14% mainly due to contribution from the Berantai RSC with barely breakeven Newsfield operation. We understand that in-field drilling is on-going with production to slightly decrease YoY.

• Negotiation on gas sales agreement on SK310 field remains on track and expected to commence development in 2H15 with 1st gas in 2017. Associate and JV income continue to decline QoQ and YoY as SapuraAcergy has completed Gumusut- Kakap projects.

• With the conversion of US$2.3bn conventional debt to Islamic facility with no change to interest rates and covenants, SKPetro will now be Syariah compliant.

• In 1QFY15, Petrobras contracts contribute about US$4m in term of PBT as there are 2 vessels operating currently and will add another in FY16 and further increase to total 6 units in FY17. Management reassured again that payment is on time and risk of contract termination is low given the PLVs are used in field development to increase production. Interestingly, most of the fields in Brazil (circa 81%) are commercial viable at US$60/bbl.

• Current orderbook stand at RM26bn and in term of earnings visibility, 78% of our FY16’s forecast has already been secured. We understand the company has high chance to secure some international contracts in near term.

Risks

• Execution risk,
• Prolong low oil price,
• Delay in contract award.

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, plunged in oil price.

Valuation

Share price has corrected by 13% since our downgraded. With current upside provides ~18% return, we upgrade our call from HOLD to BUY call with unchanged TP of RM2.85 based on unchanged 14x P/E.

Source: Hong Leong Investment Bank Research - 16 Jun 2015