The five newly secured T&I related contracts totalling RM264m is positive to SKPETRO, which helps to underpin its E&C division while demonstrating the ability to win contract consistently from different clients in such a challenging environment. However, no change to our earnings forecasts as it is within our order book replenishment assumptions. Maintain MARKET PERFORM call with unchanged TP of RM1.48 pegged to 0.7x FY18 PBV due to minimal near-term catalysts.

Five contracts totalling RM264m. Yesterday, SKPETRO announced that its wholly-owned subsidiary, SapuraKencana TL Offshore Sdn Bhd has been awarded five contracts, mainly involving transportation and installation (T&I) of offshore facilities as well as demobilisation of FPSO from local and foreign clients such as Petronas and PTSC Offshore Services with a combined value of approximately USD65.3m (equivalent to RM264.0m). The contract period of these contracts varies from 1 to 8 months, spanning until FY18 (Refer overleaf for contract details).

Improve asset utilisation. We are positive on the news as it continued to demonstrate its ability to secure contract under such a tough and competitive environment. The contract period is relatively shorter term in nature, in line with oil majors’ strategy to avoid long-term commitments amidst the uncertain environment. SKPETRO is likely to mobilise the other heavy-lift and pipe-lay vessels such as LTS 3000, SapuraKencana 900 and 2000 for these jobs as the SapuraKencana 1200 and 3500 have been allocated for contracts secured earlier on. We gather that these projects fetch margins that are in line with its international E&C project margin at mid-teens and expected to contribute RM39.6m to FY17-18E PBT.

No changes to our FY17/18E earnings forecasts. With the latest win of RM264m, this brings the YTD win to RM3.3b which is still within our total group order book (including both drilling and E&C segments) assumption of RM4.0b for FY17. Hence, we are maintaining our FY17-18E earnings given that RM1.5b worth of jobs are related to two 10+5 O&M contracts – which was clinched by SKPetro’s 50:50 JV entity, which has minimal earnings contribution on a per annum basis.

Maintain MARKET PERFORM call. We are maintaining our target price at RM1.48, pegged to 0.7x FY18 PBV, higher than the current sector valuation of 0.6x PBV. In view of minimal near term catalysts coupled with order book replenishment risk for drilling and E&C segments, we reiterate MARKET PERFORM call on the stock.

Downside risks to our call include: (i) weaker-than-expected margins, (ii) lower-than-expected contract replenishment, and (iii) contract termination.

Source: Kenanga Research - 2 Sep 2016