Results

• Below: Excluding non-cash items of RM1.5bn (including net provision, forex gain and deferred tax adjustments), FY16 core PAT accounted for 80.0% and 83.1% of HLIB and consensus full-year estimates, respectively.

Deviations

• Weaker than expected drilling and energy business performance.

Highlights

• With oil prices turning weaker in 1QCY16, SAKP made a total provision of RM1.3bn in 4QFY16, comprising net provision of energy division of RM717m, impairment on drilling assets of RM282.2m and impairment on E&C of RM144.1m. Upstream assets again have its carrying value revaluated based on an a more conservative oil price curve.

• Excluding the non-cash item, 4QFY16 PAT turned to core losses of RM92.9m due to negative contribution from Energy division as well as weaker drilling and E&C division amid slow O&G activities.

• Energy business was in a slight loss position due to lower lifted barrels and lifting price in the quarter. In 4QFY16, lifting price was realized at USD37/bbl compared to USD63/bbl in a year before. In addition, lifted bbls were lower YoY at 1m bbls in 4QFY16 vs. 1.2m bbls in 4QFY15.

• For its drilling business, PBT slumped by 60% YoY as more rigs completed their current contracts in FY16. Moreover, some rigs have seen their contracts renewed at a significantly lower DCR in view of weaker drilling environment. Some of its aged rigs are also cold stacked to reduce cash costs on the asset in view of lack of near term drilling contracts to be secured.

• E&C division‘s PBT was 20% lower YoY mainly attributable to lower scope of work for the yards for domestic jobs which are reaching their completion stage. This is being partially offset by higher work orders for its international division.

• Outstanding orderbook stood at RM21bn with 70% comprises of international E&C jobs, mainly consist of the Petrobras pipe laying vessel contract. While FY17 remains well covered at 70% by existing contracts, orderbook replenishment remains a concern for the group in 2016 to sustain its revenue base beyond FY17.

Risks

• Execution risk, prolonged low oil price and delay in contract award.

Forecasts

• We increased FY17 earnings by 3.3% post full year housekeeping adjustments. FY18 core net profit was introduced on the assumption of higher oil price in energy division and RM2b fabrication contract replenishment.

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

• Despite concerns about oversupply from US Shale and Iran, oil price trend is now firmer with talks of oil producing countries agreeing to output freeze. We upgrade the stock to Hold from Sell higher TP of RM1.81 based on higher PER target of 13x from 12x previously to partially price in the potential upside from the monetisation of its gas assets (SK310 B15).

Source: Hong Leong Investment Bank Research - 28 Mar 2016