News     Yesterday, Sapurakencana Petroleum (SKPETRO) announced that its jointly controlled entity Sapura Navegação Marítima S.A (50:50 JV) between TL Offshore Sdn Bhd and Seabras Serviços De Petroleo S.A. had received contracts to charter and operate three units of Pipe Laying Support Vessels (PLSV) for a total award value of approximately USD2.7b (c.RM8.4b). 

The contracts are for a period of eight years with the extension option of an additional eight years and are expected to commence operations by 2QCY16. 

The three PLSVs will purportedly be constructed outside Brazil. 

This is SKPETRO’s second big win from Petrobras. The first contract for three PLSVs, worth c.USD1.4b (c.RM4.3b), was won in Nov-2011 and should commence operation in 4QCY14.

Comments    We are positive but not surprised by the announcement as market talk already had it that SKPETRO was the frontrunners for some Petrobras pipelay bids.  

Based on the contract, the implied average daily charter rate (DCR) per PLSV is USD308.3k. This is a 20% premium to the implied average DCR per PLSV of USD255.7k for its contract won in 2011. We suspect this is because the current contract involves higher tonnage (550-tonnes) PLSVs. We believe the previous contract, involved one 300-tonnes PLSV unit and two 550-tonne PLSV units.

As the contract was won by a JV, it will be equity-accounted by SKPETRO. 

In the near term, we expect to hear of SKPETRO’s financing details for the upcoming vessels, which we are pleasantly surprised, will be all constructed outside Brazil given the local content requirement typically expected for projects from there. 

We estimate the current win will bump its order book to RM28.0b from the current estimated RM20.0b. 

Outlook    Updated order book stand makes SKPETRO the domestic player with the largest order backlog.

We understand that the company is actively pursuing:             

(1) more EPCIC contracts; (2) another Risk-service contract; (3) an extension of the Pan-Malaysia Installation contract bids which is purportedly already out for tender.

Forecast    While we are very positive on the contract win, the earnings will only be recognised in 2016 (which is SKPETRO’s FY17) and as such, will not affect FY14-15 earnings.

We also maintain our earnings estimates pending SKPETRO’s 1QFY14 results and guidance during its analyst briefing, which will be announced today and next Monday respectively. 

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 competitions could impact its margins as there are a number of global players in its field.

Source: Kenanga