News

SKPETRO announced the award of contracts and extensions with a combined value of USD72.0m or c.RM300.0m.

Breakdown of contracts awarded as per below: - Malaysia: Provision of Engineering, Procurement, Construction & Commissioning (“EPCC”) for Simultaneous Production and Drilling (“SIPROD”) on D35DP-B Contract by Roc Oil (Sarawak) Sdn Bhd for four months commencing in 4Q15. - India: Installation of structures and pipelines and other subsea work subcontract from L&T Hydrocarbon Engineering Limited for the Additional Development of the Vasai East Project in India, at Vasai East (“Works”) which is located in the Arabian Sea approximately 78km offshore Mumbai. - West Africa: Additional five month contract for its semi-Tender Assist Drilling Rig “SKD Alliance” for Foxtrot International LDC (Foxtrot) in Côte d'Ivoire. Comment s

We are positive on the announcement as it indicates SKPETRO’s ability to replenish contracts amid slower upstream activities.

With the multiple contracts win, it brings the YTD Engineering and Construction (E&C) contracts announced to USD583m (c.RM2.1b). This is deemed within our expectations despite being slightly higher than E&C contract replenishment of RM2b assumption in FY16 in view of slower revenue recognition in FY16.

We believe SKPETRO should be able to maintain its typical project EBITDA margin of 18% for EPCC project in Sarawak while offering competitive rates for clients with on-going cost optimisation measures.

Meanwhile, EBITDA margin is expected to be lower at c.20% compared to typical average margin of 25% as profitability is usually narrower for installation subcontract.

Furthermore, even though the respective contract values are not disclosed, we gather that SKD Alliance has been working for Foxtrot since February this year and the contract was extended with the same rate. Hence, we opine the project should fetch its historical PBT margin of 20%.

Outlook

SKPETRO’s latest orderbook stands at RM21b, as of November mainly comprising international T&I and fabrication jobs, including Brazil.

Two Petrobras PLSVs (Diamante and Topazio) are now working in Brazil’s deepwater oil basin. The assets are currently running at full utilisation and Petrobas sees no sign of slowdown in its projects with timely payments from Petrobras. Its 3rd PLSV (Onix) has been delivered and operations commencing recently, pointing to contribution in 2H16.

On its Pan Malaysia HUC contract, work orders have been secured from Petronas and other PSCs, keeping the group busy albeit at a lower rate, allaying near-term worries over a significant slowdown in its HUC contract. Meanwhile, its E&C division remains strong with multiple international projects at hand.

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. Economics of the field remains viable as its EBITDA breakeven is at c.USD15-17/bbl.

Forecast

Earnings and forecast are maintained for now pending for the quarterly announcement in mid-December.

Rating

Maintain MARKET PERFORM

Valuation

We maintain our TP at RM2.38 pegged to unchanged PER of 14x, which is in line with Big Cap O&G down-cycle valuation.

Risks to Our Call

Lower-than-expected margins for business segments

Lower-than-expected contract replenishment.

Source: Kenanga Research - 8 Dec 2015