Period

1Q16

Actual vs. Expectations

1Q16 results came in within expectations with core net profit of RM248.4m making up 24%/23% of house’s/street’s FY16 estimates.

Dividends

1.35 sen DPS was declared, which is a positive surprise as we did not expect any dividend to be declared for the next two years.

Key Results Highlights

1Q16 core net profit declined by 25.7% YoY due to weaker Engineering & Construction (E&C) and Energy divisions on lower oil prices albeit being partially offset by stronger Drilling segment. Meanwhile, overall group EBIT margin was maintained at 35% level YoY despite weaker Energy division due to higher contribution from the higher margin drilling segment in the quarter.

On QoQ basis, 1Q16 core net profit leapt by 28.8% despite a 5.7% decline in revenue due to stronger contribution from both Drilling and E&C divisions partially due to seasonality and higher work done in the quarter.

E&C: 1Q16 PBT declined by 17.6% YoY following a 4.3% YoY drop in the division’s top line mainly due to lower scope of HUC works on existing contracts, especially for the local business. This is being partially offset by improvement in its international E&C business with new jobs being executed in the quarter. On QoQ basis, PBT from the division actually improved 9.4%, which is in line with QoQ improvement in margins, underpinned by higher margin works being executed in 1Q16.

Drilling: PBT surged by 26.8% YoY on the back of higher drilling revenue (+19.4% YoY) due to commencement of contract of SKD Kinabalu and higher rig utilisation in the quarter driven by more activities. The effective number of rigs working in the quarter is similar as Teknik Berkat ran out of contract in 4Q15. QoQ, drilling PBT improved marginally by 5.1% also due to a slightly higher rig utilisation rate. (Refer to page 2 for results highlights & outlook.)

Energy: PBT for the division plunged 84.2% YoY mainly due to lower crude oil prices, which in turn resulted in significantly lower profit contributions from its Malaysian oilfield assets. Moreover, lower barrels of oil lifted as a result of natural decline of oil production from its PSC also contributed to the lower profit. Since 4Q15, the group has reduced its infield drilling (for production enhancement) on its producing fields to save costs amid lower oil prices. QoQ, PBT for the division also declined, by 47.3% as a result of lower lifting prices caused by sharp drop in oil prices QoQ.

Change to Forecasts

We maintain our earnings forecasts for now

Rating

Maintain MARKET PERFORM.

Valuation

We have decided to increase our target CY16 PER from 13x to 15x due to inclusion of the group in the Shariah-compliant listing in the May review recently. As a result, our TP is increased to RM2.55 form RM2.24 previously.

Risks to Our Call

(i) Unexpected sharp drop in oil price.

(ii) Unexpected delays of projects on hand.

Outlook

SKPETRO’s latest orderbook stands at RM24.5b, mainly comprising tenders for its E&C division.

For now, the drilling division Teknik Berkat, its tender barge has yet to win any contract. Besides, three other semi-submersible rigs (West Berani, West Menang and West Jaya) will have to search for new contracts in the market this year and the renegotiated rates of new contracts may be under downward pressure given the weakness in the rig market.

Two Petrobras PLSVs (Diamante and Topazio) have been delivered and is currently contributing to the group. The assets are currently running at full utilisation at the moment and Petrobas see no signs of slowdown on its projects with payments from Petrobras still on time. Its next PLSV is on track to be deployed in September this year and is expected to contribute positively to the group.

On its Pan Malaysia HUC contract, work orders have been secured from Petronas and other PSCs, keeping the group busy until October, allaying near-term worries over significant slowdown in its HUC contract.

Its Vietnamese upstream asset acquisition is still pending approval from the Vietnamese government. It still has until early 2016 to satisfy the conditions stipulated in the SPA signed last year.

For Newfield projects, gas discoveries in SK301 have been transformed into 2P assets. It is close to securing a gas sales agreement with Petronas (targeted to be signed in Q216) to monetise its gas assets, but significant earnings contribution is expected to be only seen post 2018.

Source: Kenanga Research - 16 Jun 2015