Results

• Inline: Excluding net provision for impairment on O&G assets of RM345m, 2QFY16 core PAT increased 41% QoQ with 1HFY15 core PAT accounting for 56% of HLIB and consensus full-year estimates, respectively.

Deviations

• Expect weaker 2HFY16 due to lower crude oil price and lower contribution from tender rig business.

Highlights

• Given Brent oil prices has declined by 30% within 2 months, SAKP made a provision for impairment on its oil and gas assets after factored in lower long term oil price assumptions (pushed back $100 per barrel scenario from 2019 to 2025). Current oil and gas assets are carrying remaining value of US$1bn on the balance sheet.

• Excluding the non-cash item, 2QFY16 PAT increased by 41% QoQ mainly due to strong cont ribution from tender rig division with higher margin. Going forward, we expect tender rig business to face pressure in term of lower charter and utilisation rate given the challenging outlook. Another four tender rigs contracts are expiring with new charter rate expected to experience 10-25% reduction.

• Energy business remain profitable after excluding the impairment due to higher average realised selling price of US$66/bbl in 2QFY16 coupled with recurring income from Berantai. We understand that EBITDA breakeven level for fields in Malaysia was lowered to US$35/bbl after implementation of cost cutting measures.

• Negotiation on gas sales agreement on SK310 field remains on track and expected to conclude by end of 2015 with 1st gas in 2017. This should serve as a re-rating catalyst and help to monetise its reserve.

• Outstanding orderbook has shrunk from RM26bn to RM23bn. The near term risk is slower orderbook replenishment given only 65% of our FY16’s revenue has already been secured.

Risks

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

Forecasts

• FY17 earnings reduced by 19% to reflect the fall in crude oil prices as well as lower utilisation and charter rate from tender rig business.

Rating

HOLD

Positives

• Integrated business model, global trend towards offshore production.

Negatives

• Increased competition for growth markets, complexities of running a larger organization, plunged in oil price.

Valuation

Given that low oil price is expected to persist in midterm amid concerns about oversupply from US Shale and Iran coupled with weakening demand from China, we downgraded our target P/E from 14x to 12x and our call from BUY to HOLD with lower TP of RM2.00 (from RM2.85 previously) post earnings downgrade.

Source: Hong Leong Investment Bank Research - 17 Sep 2015