Period  1Q15/3M15

Actual vs. Expectations SapuraKencana Petroleum (SKPETRO) reported 1Q15 core net profit of RM334.3m which was within our expectations, accounted for 24.3% of our full-year FY15 estimates and 22.9% of market consensus.

 Our core net profit excludes the RM2.7m foreign exchange loss and RM177.8m gain arising from acquisition of Newfield.

Dividends  A tax exempt single tier interim dividend of 1.35 sen and special dividend of 1.0 sen was declared, which came as a surprise to us as we have not factored any dividend payout in FY15.

Key Results Highlights In 1Q15, core net profit soared 67.6% QoQ while revenue rose 29.7% QoQ after the inclusion of SKEI business financial results post completion of its acquisition on 11 February 2014.

 The 1Q15 core net profit surged 133.7% on a YoY basis, primarily due to the inclusion of Seadrill’s tender rig business and SKEI business post their acquisitions in Drilling and Energy Services (DES) segment. PBT in Offshore Construction and Subsea Services (OCSS) segment leapt 46.6% YoY, despite the revenue contracting 13.9% over the period, mainly due to higher contributions from its JV on completion of Gumusut project. PBT contribution from DES (+>100.0% YoY) and OCSS (+46.6% YoY) which helped to mitigate the decline in Fabrication, Hook-up and Commissioning (FAB & HUC) segment (-13.2% YoY).

Outlook  At our last count, SKPETRO’s orderbook stood at RM30b after the EPCIC wins. Tender book was guided to be within RM30b.

 We believe SKPETRO is scheduled to: (i) begin the new campaign for Pan-Malaysia Transport and Installation (T&I) contract, (ii) receive two DLBs and KM-2, (iii) kick-start two Brazilian pipelay-support vessels (PLSV), and (iv) account for Newfield’s earnings in CY14. All these will provide near-term catalysts for the stock.

 For Newfield projects; targets are to transform the SK310 discoveries to 2P reserves by end-CY14. For now, the resources are estimated to be at 1.5-3.0 tcf.

Change to Forecasts     We maintain our forecasts for now given that the 1Q15 result is within expectations.

Rating Maintain OUTPERFORM

Valuation  Our TP of RM5.57 is unchanged based on a CY15 EPS of 26.5 sen and target PER of 22x.

 The c.20% premium ascribed to SKPETRO (versus the 18x PER ascribed to MHB) is justified, in our view, as it is the only integrated Malaysian upstream player (from E&P to installation).

 Moreover, the stock is currently still attractively priced at CY14-15 PER of 19.3-16.3x (vis-à-vis other heavyweights such as UMW O&G that trades at CY14-15 PER of 33.2-21.4x.

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

 (ii) Lower-than-expected contract replenishment.

Source: Kenanga