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SapuraKencana Petroleum - Locking In Twin Wins

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Publish date: Fri, 02 Nov 2012, 10:06 AM
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News    Yesterday, SKPETRO announced two new awards for its wholly-owned subsidiaries: 1) Kencana-HL, received  an Engineering, Procurement, Construction and Commissioning (EPCC) award, worth RM135.8m from Hess, for a wellhead platform in the Kamelia field; and 2) Allied Marine & Equipment (AME) won an underwater services award worth RM700m from PCSB.

 The EPCC contract is expected to be completed by 1Q2013, whilst the AME contract is for the duration of 3'' years, effective from Oct-2012 to Apr-2016 with an option for an additional year extension.

Comments   We are positive on the wins. 
 Despite being marginal in terms of value, the cumulative c.RM1.0b for CY12, illustrates SKPETRO's market dominance in the local fabrication scene. The AME win, is also a testament to SKPETRO's track record, as this is the continuation from an initial project which should have expired in mid-2012. 

 The EPCC win lifts the 'Fabrication and Hook-up and Commissioning (HUC)' order backlog to RM4.1b and the AME win lifts the OCSS order book to RM9.9b (order books as at Sep-12).

 We typically assume EPCC works to have EBIT margins of 18.5%; whilst the AME project translates to revenue of c.RM200m p.a., on assumed EBIT margins of 19%.

Outlook   SKPETRO's share price has been gained some 5.2% (from last week's closing price). The strong performance  could be driven by market talks that SKPETRO could potentially secure a sizeable project or new development is expected for company.

 Notwithstanding this development, we remain positive on the company due to its domestic EPCIC market dominance and reputable international global track record that has resulted in continual contract wins. We look to discuss this potential development with management soon.

Forecast   We already assumed that AME will receive the extension for the underwater sea project, hence c.RM250m revenue in FY14. However, we believe we might have been conservative on its FY14 fabrication and HUC division contract execution given the RM4.1b order backlog thus far. Hence we are raising the segment's FY14 revenue by 9% to RM2.4b (from RM2.2b). This correspondingly results in FY14 net profit increasing by 3.5%.

Rating  MAINTAIN OUTPERFORM

Valuation    Based on an unchanged PER target of 20x on CY13 EPS, we lift our fair value on the stock RM2.90 (from RM2.80).

Premium valuations are accorded to the stock (versus 15x for the sector average and 18x for MMHE) due to its significant domestic market dominance and service scale  range.

Risks  1) High capex plans could strain balance sheet and growth prospects; 2) Highly competitive industry due to multitude of diversified global players, and 3) Downturn in the global economy affects overall oil and gas sector prospects.

Source: Kenanga 
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