News  SKPETRO announced that they have signed an USD2.3b Islamic loan with 11 lenders to convert a portion of its conventional Multi-Currency Facility borrowings into a facility based on Shariah principle.

Comments We are neutral on this news as the market has been expecting the group to refinance its current conventional loans through Islamic loans.

 No incremental impact is expected on SKPETRO’s future earnings as the interest rates of the new facility will be similar to its existing facility as guided by the management.

 As per the latest quarter ended 31st Oct 2014, its non-Islamic borrowings to total asset ratio stands at 0.49x, which is higher than the maximum 0.33x threshold set by Securities Commission to achieve the Shariah compliant status.

 The company targets to achieve Shariah compliant status by May 2015.

Outlook  SKPETRO’s latest orderbook stands at RM26.2b; 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.

Despite potential slowdown in drilling activities in the near-term, the majority of their current rig fleet is covered with contracts extending to 2016 or further ahead.

 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.

Forecast  Earnings and forecast are maintained.

Rating Maintain OUTPERFORM

Valuation  TP is maintained at RM3.03 pegged to 13.0x CY15 PER. 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-à-vis much smaller companies that trade at 9x-19.7x (ie. DAYANG or YINSON).

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

 Lower-than-expected contract replenishment.

Source: Kenanga