Period     1Q14

Actual vs. Expectations     1Q14 core net profit of RM143.0m was largely within our expectations, despite being only 13.8% of our (RM1.04b) and consensus (RM1.02b). 

Our core net profit excludes the non-cash RM49.4m foreign exchange loss.  

We consider the 1Q14 net profit to be within expectations as: 1) 1Q is typically seasonally weaker; and 2) the company should be consolidating the tender-rig contributions from 2Q14 onwards, which we suspect will accelerate earnings going forward.

Dividends    No dividend was declared as expected.

Key Results Highlights   QoQ, the revenue was down 17.1% mainly due to lower earnings across all segments, especially the offshore construction and sub-sea services (OCSS) and energy and joint ventures (EJV) divisions. However, core net profit was higher by 66.7% due to better margins from all the divisions. 

YoY, revenue and net profit were up due to 1QFY13 being skewed by lower earnings consolidated from Kencana, as according to merger accounting only proceeds from the merger date onwards can be accounted for in the merged entity.  Despite this, we note that there was a significant jump in the revenue and net profit of OCSS division largely due to higher scope of works for Pan Malaysia contracts on the back of client planned activities and several new contracts executed during the current quarter by SapuraClough.

Outlook    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.

Change to Forecasts   We are maintaining our earnings estimates for now pending the company’s analyst briefing today.

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 for the company could strain its growth prospect and 2) delay in contract executions could result in lower than expected earnings.

Source: Kenanga