News

• SapuraKencana Petroleum Berhad was awarded a contract with a value of approximately USD125.9m (RM510m equivalent).

• The contract is for the Engineering, Procurement, Construction and Installation (“EPCI”) of offshore pipelines and fibre optic cables for the Trans Anatolian Natural Gas Pipeline (TANAP) (“Contract”) from TANAP Doğalgaz İletim A.S.

• The work location is at the Dardanelles Strait in the Sea of Marmara. The Project is scheduled to commence in the third quarter of 2016 and ends in third quarter of 2018.

Financial Impact

• Definitely a positive win for the group but it is still deemed within our forecast range as its Pan Malaysia T&I contract is coming to tail end in end of this year while activities have slowed for the contract in line with general industry condition.

• Assuming 8% margin, the contract is expected to contribute RM40.8m EBIT in total for the group from the whole contract, which is sufficient to partially fill up the void to be left by slowdown and conclusion of its existing orderbook in the later part of the year.

• Nevertheless, this is still an early positive sign for the group and it indicates a mild pick-up in activities in the sector but we opine that it is still too early the gauge the speediness and extent of the overall recovery of O&G industry.

Pros/Cons

• Recent multiple contract wins have showcased the group’s ability to secure contracts at the global level despite stiff competition amidst times of contract draught.

• Field Development Plan (FDP) for the SK310 block B15 field by the group has been approved by Petronas with 1st gas targeted to be at 4Q17.

• For its T&I segment, likelihood of premature contract termination remains low for the company for the time being. All vessels working for Petrobras are still operating at full utilisation, showcasing client’s confidence in SKPETRO’s service despite slowdown in the industry.

• Overall, near term outlook has turned to slight positive for the group but we opine that it is still in the early stage of recovery.

Risks

• Execution risk;

• Prolonged low oil price; and

Forecasts

• Maintain forecast.

Rating

HOLD

• Positives – Integrated business model, global trend towards offshore production, ability of winning contracts even in tough markets.

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

Valuation

We maintain our HOLD call based on unchanged 0.6x PBV FY18 PBV with TP at RM1.35. The company is still in its early stages of recovery and we do not discount the possibility of valuation rerating of the stock due to better contract award prospects in 6 months or 1 year time.

Source: Hong Leong Investment Bank Research - 29 Jul 2016