News

• SapuraKencana has announced that its proposed acquisition of Vietnam assets has been terminated through mutual agreements.

• Earlier on 20th November 2014, the company had entered into conditional sale and purchase agreements (“SPA”) to acquire PSC upstream assets in Vietnam from Petronas Carigali for USD400m. Financial Impact

• It will not have any financial impact on the company as no CAPEX has been incurred for the project yet.

Pros/Cons

• This is a positive development as it allays concerns of the company stretching its already highly-geared balance sheet further to buy upstream assets which may be even cash burning if oil prices plunge towards USD20/bbl.

• As of 31st October 2015, the group’s net geari ng stood at circa 1.3x which is considered high on local O&G industry standards (average net gearing is estimated to be at 0.4- 0.6x). The group could have geared up to 1.4x if they proceed with the asset acquisition assuming 100% debt funding.

• On top of that, project funding could be an issue whereby funding costs through both debt and equity issuance may be significantly higher than before due to heightened market risks for O&G companies amidst crude oil price slump.

Risks

• Execution risk;
• Prolonged low oil price; and

Forecasts

• FY17 net profit forecast has been cut to RM806m from RM922m previously to reflect our lower crude oil price assumption of USD30/bbl (from USD50/bbl previously) for its upstream 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

• We opine that low oil price is likely to persist in the midterm amid concerns about oversupply from US Shale, unchanged production from OPEC and li fting of Iran sanction. We maintain our HOLD recommendation with lower TP of RM1.64 based on lower 12x CY16 EPS.

Source: Hong Leong Investment Bank Research - 26 Jan 2016