SapuraKencana Petroleum's (SKPETRO) 9MFY13 net profit came in within ourexpectations  but  below  consensus,  accounting  for  72.2%  of  our  initial  full-year estimates and 68.7% of consensus'. As management has guided for a weaker 4Q, we  are  trimming  our  FY13  earnings  estimate  by  5.1%  to  incorporate  the  weaker quarter  due  to  the  monsoon  season  but  leaving  our  FY14  earnings  estimate unchanged. We continue to believe that there would be more upside to our current valuations  post-acquisition of Seadrill's drilling assets. Maintain BUY, with an unchanged fair value (FV) of RM3.00.

Within  expectations.  SKPETRO's 9MFY13 net profit was within our expectations but below  consensus,  accounting  for  72.2%  of  our  initial  full-year  estimates  and  68.7%  of consensus'. Revenue grew 7.7% q-o-q  due  to  the  higher  revenue  recorded  by  its offshore construction and subsea services (OCSS) division but EBIT margins shrank to 12.9%  compared  to  13.8%  in  the  preceding  quarter  due  to  lower  works  in  its  drilling business  unit  and  the  lower  vessels  utilization  in  its  geotechnical  business  unit  due  to dry docking and repair maintenance work.

Expect weaker 4Q results. We understand from management that 4QFY13 results are likely  to  come  in  weaker  compared  our  earlier  estimates  in  view  of  slower  activities during  the  monsoon  season,  when  most  of  its  vessels  will  undergo  dry  docking  and repair  maintenance  works.  Hence  we  are  trimming  our  FY13  earnings  estimates  by 5.1%  to  incorporate  the  seasonally  weaker  quarter  but  leave  our  FY14  earnings estimates unchanged. The group's orderbook remains strong at RM13.5bn as at end of October and this will last the group till 2016-17.

Undergoing  due  diligence  for  the  Seadrill  acquisition.  To  recap,  SKPETRO announced  last month  that  it has signed a  non-binding  memorandum  of  understanding (MOU)  with  Seadrill  (SDRL  US:  Non  Rated)  for  the  proposed  combination  and integration  of  the  tender  rig  businesses  of  both  SKPETRO  and  Seadrill.  Management highlighted  that  its  lawyers  are  still  performing  due  diligence  works  and  the  deal  is expected  to  be  closed  by  end-Jan 2013 so that Seadrill's earnings could be fully incorporated into its FY14 earnings.
 
Maintain  BUY,  FV  RM3.00.  In  view  of  more  upside  to  our FY14  earnings  forecast,  we advocate  investors  to  accumulate  the  shares  as  there  should  be  a  theoretical  22.7% boost  to  our  FY14  earnings  forecast  post-acquisition of Seadrill's drilling assets.  Note that we have not incorporated Seadrill's earnings into our earnings forecast until the final structure of the deal is disclosed. All in, we continue to like SapuraKencana Petroleum and the stock remains as one of our top picks in the O&G sector besides Dayang (BUY FV RM2.90) and Dialog (BUY FV RM3.45).

 Source: OSK