News

• SKPETRO has been awarded contracts with a combined value of approximately US$65.3m (circa RM26m, based on USD/MYR exchange rate of USD1: RM4.04).

• The award comprises of mainly T&I jobs in Malaysia, Thailand & Vietnam with most of the contracts having less than one year tenure from clients such as Petronas Carigali, Repsol and Exxonmobil.

Financial Impact

• While this is still considered within our assumption of E&C contract replenishment, it represents a relief that the group managed to showcase its superior project execution abilities to be able to secure multiple T&I jobs which are hard to come by during current turbulent times in the industry.

• This is the second announcement of more T&I jobs form the group after its previous TANAP offshore pipeline job worth US$125.9m, indicating a slight pickup of activities in the offshore market.

Pros/Cons

• 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, likehood 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.

• More T&I jobs could be announced before end of this year before from the potential Pan Malaysia T&I umbrella contract packages to be awarded later in 2016.

• Overall, near term outlook remains uncertain for the group amidst volatile crude oil price environment, in line with the current global O&G industry slowdown.

Risks

• Execution risk;

• Prolonged low oil price; and

Forecasts

• Maintained.

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 from HOLD call based on unchanged 0.6x PBV FY18 PBV with TP at RM1.35. Recent surge in share prices already reflected improved contract flow but volatility of oil prices still persists, posing earnings risk to the group.

Source: Hong Leong Investment Bank Research - 2 Sep 2016