Period  4Q14/FY14

Actual vs. Expectations SapuraKencana Petroleum (SKPETRO) reported 4Q14 core net profit of RM199.4m which brought FY14 net profit to RM911.2m, below our expectations at c.94% of our forecasts (RM962.7m) but missed consensus estimates (RM1.0b) at 91.0%.

 We exclude FY14 unrealised foreign exchange gain of RM175.7m from the reported FY14 earnings (RM1.09b) as we deem it as a non-cash item.

 The variance to our forecasts was largely due to the slower-than-expected project execution in the OCSS and Fab & HUC divisions, which led to margin squeeze in the final quarter.

Dividends  No dividend was declared as expected.

Key Results Highlights QoQ, 4Q14 net profit was seasonally lower (-25.9%) mainly due to the significantly lower OCSS contributions given that the Gumusut-Kakap, DOMGAS and Pan-Malaysia T&I contracts were already largely completed in the previous quarter. Nevertheless, this was mitigated by better earnings from the DGMS and EJV divisions; likely to be due to a full quarter contribution from the Berantai field.

 YTD YoY, revenue and net profit were unsurprisingly up 21.2% and 84.6%, respectively, mainly due to better earnings from the drilling division (DGMS and EJV) with the inclusion of Seadrill’s tender rigs (that was acquired during the year) and Berantai RSC earnings.

Outlook  Whilst we had anticipated a weaker 4Q14 result, we did not expect such a drastic drop in the OCSS division.

 At our last count (Nov-13) SKPETRO’s order book stood at RM25.9b, whilst tender book was guided to be within RM24b.

 We believe SKPETRO is scheduled to (i) begin the new campaign for Pan-Malaysia Transport and Installation (T&I) contract; (ii) receive 2 DLBs and KM-2; (iii) kickstart two Brazilian pipelay-support vessels (PLSV); and (iv) account for Newfield earnings in CY14. These will provide near-term catalysts for the stock.

Change to Forecasts SKPETRO is hosting an analyst briefing today, where we hope to gleam further details on its results and also future prospects. We maintain our forecasts for now.

 We also look forward to introduce our FY16 earnings.

Rating Maintain OUTPERFORM

Valuation  Our unchanged target price of RM5.81 is based on an implied target PER of 27.1x on CY14 EPS of 21.4 sen 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