Yesterday, we attended SapuraKencana’s 4Q14 analysts’ briefing that was hosted by Tan Sri Sharuddin. Key takeaways were:

Results above expectations after all. 4Q apparently featured a one-off cost of c.RM130m due to the Seadrill transaction. Excluding this cost item, 4Q net profit is RM329.4m with full-year net profit of RM1.04b (versus our initial estimates of RM119m and RM911.2 respectively). This is c.8% above our full-year forecasts of RM962.0m but within consensus expectations of RM1.0bn. The tax credit within the quarter is a one-off adjustment to account for tax expense over-provision within the year. Variance to our earnings stems largely from the better-than-expected earnings from the Berantai field which kick-started in 3Q14. However, this was offset by the slower-than expected earnings in the OCSS and Fab and Huc division.

Order book stands at RM25.5b. The bulk of the order book sits with the OCSS segment; of which c.RM12.6b is for the Brazilian PLSV contracts, the remainder of RM5b is largely, in our view, due to the Pan Malaysia IPF project won in Dec last year. Tender book is RM25b, largely due to OCSS-type of projects (c.RM14.7b). Near-term contract replenishment (within the next two quarters) is likely to be from the drilling and fabrication divisions. For the fabrication space, SKPETRO is bidding for 12 live contracts of which the results should be known in June/Jul-CY14.

Near-term Newfield’s prospects hinge on production assets. Post the completion of the Newfield acquisition in Feb-14, we expect a full-year contribution to be reflected in FY15. 2013 net production was guided to be at 20-25k boepd and efforts to stem natural field decline (typically 15-20% per annum) via infill drilling programmes is being planned for 2014. We have assumed a 23k boepd production this year. In the longer-term, management targets to add reserves by developing the SK310. Targets are to transform the discoveries to 2P reserves by end-CY14. For now the SK310’s resources are estimated to be at 1.5-3.0 tcf. Future capex likely to be plowed into upstream ventures. We gathered that SKPETRO favours upstream ventures as most of its previous expenditure has been focused on assets for its service divisions. Market rumours have emerged that SKPETRO might be eyeing Newfield’s China assets, some of Murphy’s Malaysian assets and more RSCs; which is now is not surprising given the recent reaffirmation by management.

Missing the Syariah compliant mark. SKPETRO will unlikely to remain Syariah compliant in the upcoming May-14 review as its recently refinanced RM16.5b loans (of which ~75% are USD-denominated) will not meet the requirements. Management guided that is still considering the refinancing of c.RM6.5b (~39%) of total borrowings to meet the requirements, but also emphasises that the bulk of its earnings are still USD-denominated hence a revamp to Islamic financing might not make savvy business sense.

FY15-16 net profit forecasts. Post the results briefing we have reduced our FY15 net profit forecast by 16.1% to account for: (i) lower margins and revenue recognition for the wholly-owned OCSS division given that the main reliance is on the Pan-Malaysian project in FY15, (ii) lower revenue recognition in the fabrication division as contracts wins are pushed to 2H onwards (versus our projections of earlier wins), and (iii) lower Newfield production as we had benchmarked FY15 production to Newfield’s CY12 production, which was significantly higher. We forecast a 17.1% growth for FY16 net profit; mainly on the back of contributions from new assets ie. (2 new derrick-lay barges (DLB); 2 tender-rigs and 2 ½ Brazil vessels) and contract wins in the fabrication business (RM3bn).

Maintain OUTPERFORM with TP of RM5.57. We are rolling-forward our target price base to CY15 (in-line with entire sector). Based on a CY15 EPS of 26.5 sen and unchanged target PER of 22x, our TP is reduced to RM5.57 from RM5.81. Despite the reduction, we still believe there is ample upside in the stock. We believe the c.20% premium ascribed to SKPETRO (versus the 18x PER ascribed to MMHE) is justified as SKPETRO is the only integrated Malaysian oil and gas company. We believe the stock is still attractively priced at a CY14-15 PER of 18.9-16.1x (vis-à-vis other heavyweights such as UMW O&G that trades at CY14-15 PER of 31.5-19.3x.

Risks include: (i) Lower-than-expected margins; and (ii) Lower-than-expected contract replenishment for SKPETRO’s business segments

Source: Kenanga