Sapura  Kencana  Petroleum  (SKP)'s 1HFY13 earnings were below expectations, accounting  for  30.2%  of  our  FY13  full-year  forecasts.  The  weaker  results  were mainly  attributed  to  the  ~RM150m  cost  of  the  merger  between  SapuraCrestPetroleum and Kencana Petroleum, the bulk of which was recognized in 1QFY13. We are trimming our FY13f and FY14f earnings by 23.1% and 5.5% respectively to reflect  the  one-off  costs  associated  with  the  exercise.  Nonetheless,  the fundamentals  of  the  company  are  intact  and,  with  that,  we  are  maintaining  our BUY call on SKP with an unchanged FV of RM2.88.

Below expectations. SKP's 1HFY13 earnings were below expectations, accounting for 30.2%  of  our  FY13  full  year  forecasts,  mainly  due  to  costs  associated  to  the  merger between  SapuraCrest  Petroleum  and  Kencana  Petroleum.  Although  the  costs  were spread/amortised,  the  bulk  of  the  expenses  were  recognized  in  1QFY13,  thereby lowering  its  overall  1HFY13  net  profit.  Nonetheless,  the  group  managed  to  expand  its top-line  by  119.1%  y-o-y  and  bottom-line  by  44.0%  y-o-y,  largely  from  higher  revenue recorded  by  its  offshore,  construction  and  subsea  services (OCSS) segment  (+171.7% y-o-y), in line with the higher work scope for Pan-Malaysian contracts.

Orderbook  still  strong  at  RM14.5bn.  During  the  analyst  briefing  yesterday,  the management  shared  that  its  orderbook  remains  strong  at  RM14.5bn,  with  46%  of  the jobs  in  Malaysia,  32%  in  Brazil  and  Mexico  combined,  16%  in  Australia,  5%  in  South East Asia and 1% in other regions. Management also shared that it will recognise 64% of the existing orderbook as revenue in FY13 and FY14 while the remaining 36% will be only recognised beyond FY15. The group is expected to  snap up more contracts when
Petronas awards more jobs in 2H12.

Trimming  FY13-FY14  earnings  forecast.  We  are  taking  the  opportunity  to  trim  our FY13f and FY14f earnings forecast by 23.1% and 5.5% respectively to reflect the one-off merger  costs  and  related  accounting  matters.  Despite  the  downgrade  in  earnings,  the company's fundamentals are intact as it  is  poised  to  benefit  from  bigger  and  more ucrative oil and gas (O&G) projects in and outside Malaysia moving forward.

Maintain  BUY.  Our  FV  is  maintained  at  RM2.88  despite  the  downgrade  in  FY13 earnings,  rolling  over  valuations  to  FY14's  earnings  (it  was  previously  pegged  to  FY13 earnings). Our valuations are based on a FY14 PE of 20x (previously, FY13 PE of 20x).
SKP is still as one of our top O&G picks as the company has the right business model with big opportunities ahead.

Source: OSK