Period

4Q16/FY16

Actual vs. Expectations

In 4Q16, SKPETRO posted an unexpected core net loss of RM135.9m, bringing its FY16 core profit to RM714.5m. This is below our/street’s expectations by 30%/29%. The variance from our forecast is largely due to weaker-thanexpected margins especially in E&C segments and lowerthan- expected crude oil prices.

Our core net profit excludes: (i) RM320.7m forex gain, (ii) impairment provision of PPE and O&G properties worth RM2.0b, and (iii) deferred tax liabilities post impairment amounting to RM294.5m.

Dividends

No dividend was declared as expected.

Key Results Highlights

Sequentially, SKPETRO swung to a core net loss of RM135.9m in 4Q16 from RM249.6m core net profit in 3Q16, in line with a 22.8% decline in topline, due to weaker contribution from all divisions amidst the weak crude oil market. PBT margin plunged to 0.4% from 16.9% in the preceding quarter no thanks to margin compression from E&C and drilling segments. On YoY basis, earnings also fell from RM57.3m in 4Q15 largely marred by E&C and drilling segments but partially offset by narrowing loss in energy division.

FY16 core net profit plunged by 41.3% YoY to RM714.5m despite marginal growth of 2.4% in revenue due to weaker Energy division’s performance driven by plunge in crude oil prices and lower contribution from associate and JVs . PBT before impairment appears to grow by 1.1% YoY to RM1.408b from RM1.392b in FY15. However, if we strip off the net forex effect, PBT before impairment dropped 22.0% YoY to RM1.088b from RM1.393b which we believe was dragged by margin compression. (Refer overleaf for more details.)

Outlook

We believe margin erosion is a concern in all three segments in the near-term even with oil prices recovering to USD50/bbl as most oil majors are still in aggressive cost optimisation mode. (Refer overleaf for more details.)

Change to Forecasts

We cut our earnings forecast by 24.5% for FY17 to RM769.9m after factoring: (i) lower crude oil price assumption to USD38/bbl from USD47/bbl, (ii) lower EBIT margin for drilling and E&C segment, and (iii) MYR/USD assumption to RM4.10 from RM4.20.

FY18E earnings of RM832.8m is introduced assuming: (i) RM2b orderbook replenishment for E&C, (ii) average crude oil price of USD47/bbl, and (iii) average utilisation of 51% for drilling segment.

Rating

Downgraded to MARKET PERFORM as earnings risk is more apparent given margin compression could be more severe across all divisions.

Valuation

Post earnings adjustment, our TP is now reduced to RM1.93 from RM2.38, pegged to an unchanged PER of 14x as we roll forward our valuation base year to CY17, which is also in line with big caps O&G’s down-cycle valuation.

Risk

(i) Unexpected further sharp drop in oil price.

(ii) Unexpected delays of projects on hand.

Source: Kenanga Research - 28 Mar 2016