Period  2Q14/1H14

Actual vs. Expectations  SapuraKencana Petroleum (SKPETRO) reported 2Q14 core net profit of RM299.5m which brought 1H14 net profit to RM442.5m, within our expectations at 46.0% of our fullyear forecasts (RM962.7m) but slightly below consensus full-year estimates (RM1.02b) at 43.1%.

 Our full-year core net profit forecast excludes unrealised foreign exchange loss of RM61.6m as it is a non-cash item.

Dividends  No dividend was declared as expected.

Key Results Highlights  QoQ, earnings were up due to: (i) the inclusion of Seadrill’s tender rig earnings that resulted in a significant uptick in revenue and PBT of the DGMS division (+163% and +261.3% respectively), and (ii) the uptick in JV and associates earnings spurred mainly by the execution of Gumusut-Kakap in 2Q14.

 YoY, revenue and net profit were also up (+21% and 54% respectively) on reasons stated above. This helped to cushion the impact of the weaker Fab & HUC division PBT earnings (-58.1%) due to lower contract execution.

Outlook  SKPETRO’s current order book stands at RM24.8b (from ~RM26b in Aug-13). Tender book is guided to be within RM24b.

 One of the jobs that the OCSS division is currently awaiting is the Pan-Malaysia Transport and Installation (T&I) contract which SKPETRO foresees will be awarded by end-2013 to early-2014.

 The Fab & HUC division could continue to be weak in the near-term given that contracts have been slow to come by. SKPETRO believes the Samarang project will be awarded by late 2013. However, we also understand that SKPETRO is supplementing the division by embarking on some Indian EPCC bids.

 On RSCs, SKPETRO admitted that it was bidding for 2-3 deals, however, there was no guidance in regards to which ones they were eyeing.

 SKPETRO guided it is also looking closely at debt restructuring options given the impending Shariah compliance rulings will be effective this coming Nov-13. For now, we suspect SKPETRO’s conventional loans over total debts are above the 33% threshold. SKPETRO has 6-month grace period to comply.

Change to Forecasts  Given that earnings are within our expectations, we maintain our forecasts for now.

Rating   MAINTAIN OUTPERFORM

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

 We have ascribed a c.20% premium to the 18x PER ascribed to its peer MHB (UP; TP: RM3.39) given SKPETRO’s service scope and size that makes it the most integrated player in the domestic oil and gas scene.

Risks to Our Call  (i) Lower-than-expected margins for business segments

 (ii) Lower-than-expected contract replenishment

Source: Kenanga