Period  3Q14/9M14

Actual vs. Expectations SapuraKencana Petroleum (“SKPETRO”) reported3Q14 core net profit of RM269.3m which brought 9M14 net profit to RM711.8m, within our expectations at 74.0% of our full-year forecasts (RM962.7m) but slightly below consensus full-year estimates (RM1.02b) at 69.7%.

 We exclude 9M14 unrealised foreign exchange loss of RM37.91m from the 9M14 reported earnings as it is a non-cash item.

Dividends  No dividend was declared as expected.

Key Results Highlights QoQ, 3Q14 net profit was down (-10.1%) namely due to lower associate contributions in the quarter (RM39.8m versus RM99.7m in 2Q14) largely due to completion of the Gumusut-Kakap installation in the previous quarter. The significant reduction in JV earnings was, however, mitigated by better margins from the DGMS and EJV divisions.

 YoY, revenue and net profit were up 31.1% and 50.1%, respectively, mainly due to better earnings from the drilling division (DGMS and EJV) with the inclusion of Seadrill’s tender rigs.

Outlook  SKPETRO’s current order book stands at RM24.8b (from ~RM26b in Aug-13).

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

 Tender book is guided to be within RM24b.

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

Rating MAINTAIN OUTPERFORM

Valuation  Our target price of RM5.81 is based on an implied target PER of 27.1x on CY14 EPS of 21.4sen to account for proforma net profits assuming a 9-month contribution. (Pls refer to table below for basis of fair valuation).

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

 (ii) Lower-than-expected contract replenishment.

Source: Kenanga