News     Sapurakencana Petroleum (SKPETRO) announced that its wholly-owned subsidiary, Kencana HL Sdn Bhd ("Kencana HL") has received a letter of award from Trans Thai-Malaysia (Malaysia) Sdn Bhd (“TTM”) for the provision of engineering, procurement, construction, installation and commissioning (“EPCIC”) for the JDA Gas Balancing Evacuation (“EVA”) Project. 

The contract is worth approximately USD180.7m  (c.RM560.2m) for a period of three years.

Construction is expected to commence in 2QCY13 and project completion by 1QCY16.

Comments    We are positive as the ability to continually win contracts is testament to SKPETRO’s good standing amongst the oil and gas players.

This is the first EPCIC for SKPETRO this year and will bump up the “Fab and Hook-up and Commissioning (HUC)” division order book to RM2.9b (from RM2.3b currently) and Group order book to RM26.5b.

Assuming 17-18% EBIT margin, this contract could contribute around RM31.7-33m on a full-year basis.

As the contract is marginal versus SKPETRO’s Group order book of RM26.5b, we are maintaining our FY14-15 forecasts. 

Outlook    Updated order book keeps SKPETRO as the largest domestic player in terms of order backlog.

We understand that the company is actively pursuing:             

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

Forecast    We maintain our earnings estimates.

Rating    Maintain OUTPERFORM

Valuation     Our target price of RM4.72 is based on an unchanged target PER of 22x on its CY14 EPS of 21.4sen.

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) intense industry competition from a number of global players in similar field could impact its margins.\

Source: Kenanga