News

• SapuraKencana has been awarded contracts worth of US$117m or RM503m.

• The contracts including: i) Hook up and commissioning works for KNPG-B Phase 11; ii) EPC works of the sebsea isolation valve at North Malay Basic and iii) drilling contract for SKD Esperanza. Financial Impact

• These contracts win will expand its orderbook from RM21bn to RM21.5bn (2.2x of FY15 revenue).

• This will be part of and in line with our assumption on orderbook replenishment. We have factored in RM3.2bn contract replenishment in FY16 for FHC and OCSS division (YTD win is circa RM2.8bn).

Pros/Cons

• We are slightly positive on the contract awards as this will help to provide earning visibility amidst weak oil price environment.

• Outstanding orderbook stood at RM21.5bn (or 2.2x FY15 revenue). Near term risk is slower than expected orderbook replenishment given only 62% of our FY17’s revenue has already been secured.

• For its Energy business, we expect further weakening in the energy business in 4QFY16 given Brent oil price has fallen to around US$30/bbl currently versus average realised selling price of US$48/bbl in 3QFY16. In addition, we expect tender rig business to face pressure in terms of lower charter and utilisation rate given the challenging outlook. New charter rate is expected to experience a 10-25% reduction.

• On the positive side, the development approval of SK310 should help to monetise its substantial gas assets. To recap, SK310 has total reserve size of 2 tcf. Upon commencement of production, it will have 15-20 years of life span.

Risks

• Execution risk;
• Prolonged low oil price; and

Forecasts

• Unchanged.

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

We opine that low oil price is likely to persist in the midterm amid concerns about oversupply from US Shale, unchanged production from OEPC and li fting of Iran sanction. We maintain our HOLD recommendation with unchanged TP of RM1.87 based on 12x CY16 EPS.

Source: Hong Leong Investment Bank Research - 15 Jan 2016