Period  3Q15/9M15

Actual vs. Expectations SapuraKencana Petroleum (SKPETRO) reported 3Q15 core net profit (CNP) of RM337.8m, bringing 9M15 CNP to RM1.02b. This made up 75.4% and 72.5% of our and consensus, full-year FY15 estimates (RM1.38b and RM1.44b respectively).

 Our core 9M15 net profit forecast excludes RM27m forex gain, RM177.8m gain arising from acquisition of Newfield in 1Q15, RM7.3m gain on disposal of PPE and RM63.5m write-back of provisions in 2Q15.

Dividends  A surprise interim dividend of 2 sen DPS was declared in 3Q15; bringing YTD DPS to 4.4sen.

Key Results Highlights In 3Q15, QoQ core net profit was down by 4.1% mainly due to lower earnings from all divisions; (i) OCSS division was down due to lower scope of works performed, (ii) EJV division saw lower net production in the quarter, and (iii) fabrication and hook-up was affected by lower works performed in the quarter.

 YoY, earnings were up 25.5%, mainly due to the OCCS division churning better margins (due to the effective cost management measures introduced in CY14) and the inclusion of Newfield’s production earnings.

Outlook  SKPETRO’s latest orderbook stands at RM26b; whilst tender book is just a shade below that.

 For now, the drilling division is still short of one rig (Teknik Berkat) which has yet to win any contract.

 Two Petrobras PLSVs (Diamante and Topazio) have been delivered and will see material contributions in FY16.

 For Newfield projects, targets are to transform the SK310 discoveries to 2P reserves by 1QCY15. For now, the resources are estimated to be at 1.5-3.0 tcf.

Change to Forecasts We maintain our FY15 forecasts for now as earnings were within expectations.

 However, we cut our FY16 expectations by 12.9% as we: (i) assume an average CY15 crude oil price of USD70/bbl (versus USD100/bbl previously), and (ii) tweak our fabrication revenue to RM2.0b, from RM2.5b previously, as we turn conservative on the outlook of this segment with Petronas’ capex cuts. We have also introduced DPS of 4.4sen in FY16; in-line with that paid in FYE15.

Rating Maintain OUTPERFORM

Valuation  In lieu of our lacklustre outlook for crude oil price trends in CY15, we have trimmed our target PER for the sector to an average of 12x.

 We however ascribe a PER of 13x (premium of c.8%) as we believe the stock should trade above the sector average due to its service range which straddles the value chain (from 16x previously).

 Our forecast and PER cuts bring our TP down to RM3.03 (from RM4.24 previously).

 Despite the revisions, we still favour SKPETRO as we believe the risk-to-reward dynamics have improved post the significant slide in its share price. In our view, the stock is attractively priced at CY15 PER of 10.8x (vis-àvis much smaller companies that trade at 9x-19.7x (ie. DAYANG or YINSON).

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

 (ii) Lower-than-expected contract replenishment.

Source: Kenanga