News     Yesterday, Sapurakencana Petroleum (SKPETRO) announced that it had received a Hook-up, Commissioning (HUC) and Topside Major Maintenance Services contract from ExxonMobil Exploration and Production Malaysia (“Exxonmobil”).

The contract is for a primary duration of five (5) years with an additional optional (1) year extension. 

It is estimated to be worth between RM300m and RM500m over the contract period.

Comments    While we have not mentioned this contract before, it was not really a surprise given that SKPETRO’s subsidiary – Sarku Marine has participated in Shell’s HUC projects before.

We believe that such jobs will typically garner EBIT margins of around 9-10% for SKPETRO. 

While we are positive on the contract win, the contract sum is, nonetheless, marginal versus SKPETRO’s order book of RM18b.

Outlook    Post the acquisition of Seadrill’s tender rigs, SKPETRO’s order book has ballooned to RM18b. 

SKPETRO’s service range spans nearly the entire oil and gas upstream value chain, which will provide it with significant advantage during its contract bids. 

We understand that the company is actively pursuing:  (1) another Risk-service contract; and (2) more installation contracts in Brazil. It is also likely to be one of the main contenders in the next round of PanMalaysia Installation contract bids expected to be called in the coming months. 

Forecast    Maintaining our earnings estimates given the marginal size of the above contract. 

SKPETRO will be announcing its 1QFY14 earnings next month.

Rating  Maintain OUTPERFORM

Valuation     Our target price of RM4.57 is based on an unchanged target PER of 22x on its CY14 EPS of 20.7 sen. 

Risks    1) High capex plans of the company could strain its growth prospects, 2) delay in its contract executions could result in lower than expected earnings and 3) high competition could impact its margins as there are a number of global players in its field.

Source: Kenanga