News

• SapuraKencana Group has been awarded contracts and contract extensions with a combined value of approximately USD382m (approximately RM1.6bn), based on USD/MYR exchange rate of USD1: RM4.15).

• It consists of: i) 10 year turbomachinery equipment maintenance contract for Murphy Sarawak ii) 10 year turbomachinery equipment maintenance project for Petronas Floating LNG1 and iii) Extension of Contract for Semi-Submersible Tender Assist Drilling Rig SKD Jaya with BP Trinidad & Tobago LLC until April 2016. Financial Impact

• It will not have any financial impact on the company as we deemed the announcement within our expectations as we have factored in RM2bn fabrication contract replenishment and continuation of charter on SKD Jaya for both FY16 and FY17.

Pros/Cons

• It is a neutral announcement to us as majority of the value from the contract awarded are from both of the maintenance contracts spanning 10 years, implying small contribution to the group on per annum basis relative to its revenue base.

• However, margins on maintenance services are usually on the higher end (>18-20% normally achieved by group’s E&C division) which could reduce lumpiness in earnings for the group’s E&C business.

• Charter rate for SKD Jaya extension is estimated to be at USD150,000/day, similar to levels seen previously. Nonetheless, rates could come under pressure post expiry in April as the asset seeks to secure new contracts due to current weak drilling market.

• Overall, outlook remains uncertain for the group amidst volatile crude oil price environment. We still believe 2016 would be a challenging year for the group given weak contract replenishment outlook and crude prices.

Risks

• Execution risk;
• Prolonged low oil price; and

Forecasts

• Unchanged

Rating

SELL

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 downgrade the stock to SELL with unchanged TP of RM1.64 based on lower 12x CY16 EPS. Risk reward of the stock has worsened recently post its short rally in conjunction with mild recovery of crude oil prices amid speculation of supply cut by major oil producer countries.

Source: Hong Leong Investment Bank Research - 5 Feb 2016