SKPETRO’s 1H17 set of results is deemed as within expectations despite accounting for 98% of our full-year earnings estimates as we expect weaker 2H17 arising from lower drilling and E&C earnings. Meanwhile, management guided that all the P&L impact arising from cessation of Berantai RSC has been recognised in 2Q17 and Petronas will reimburse the cash pay-out by June next year. No changes to our earnings forecasts. Retain MARKET PERFORM call with unchanged TP of RM1.48 pegged to 0.7x FY18 PBV.

Deemed within expectations. In 1H17, SKPETRO booked in core net profit of RM191.3m which is deemed as within expectations despite accounting for 98%/91% of our/consensus full-year estimates as we expect a weaker 2H17 on potential drag by weaker E&C and drilling segment. Our core net profit excludes the one-off gain of RM37m arising from cessation of Berantai RSC field. No dividend was declared as expected.

Better E&C contribution QoQ. Sequentially, 2Q17 earnings dropped 36% to RM75.0m from RM16.3m in 1Q17 in tandem with a 14% drop in overall revenue due to weaker contribution from drilling segment. However, it was partially offset by better JV and associate contribution, led by stronger earnings from PLSVs chartered to Petrobras (commencement of Sapura Esmeralda in April 2016) as well as improvement in E&C segment. Note that E&C recorded a 53% growth in PBT QoQ despite a 22% drop in revenue due largely to recognition of higher-margined projects and better asset utilisation post monsoon.

Weaker contribution from all segments. On YoY basis, earnings fell 79% from RM352.3m in 2Q16, in line with a 40% decline in top line, largely marred by weaker contributions across all divisions. Energy segment earnings contribution fell significantly to RM6.0m from RM63.9m YoY due to lower average lifting oil prices at USD48/bbl vs. USD65/bbl in the corresponding period a year ago and exclusion of earnings contribution from Berantai RSC. Cumulatively, 1H17 core net profit fell 68% to RM191.3m from RM600.8m in 1H16 due to weakening revenue and margins for all three segments.

Slower order book replenishment. SKPETRO’s latest order-book weakened to RM17.7b from RM19.8b in 1Q17, mainly comprising tenders for its E&C division. The company expects RM4.4b and RM3.4b to be recognised in the remaining 2H17 and FY18 respectively. Tender book reduced to USD6.0b from USD7.0b from 1Q17 following several contract wins. We are seeing slower contract replenishment in the next two years in the absence of fabrication and offshore jobs as a result of cautious spending by oil majors.

No changes to our earnings. Despite 1H17 earnings accounting for 98% of our full-year forecast, we are maintaining our FY17/18E earnings forecasts in view of weaker prospect in 2H17 arising from weaker drilling segment as well as lower contribution from E&C segment.

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. We believe a higher premium is warranted to encapsulate its long-term positioning as an integrated service player as well as a gas producer with decent gas reserve. 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 risk to our call: (i) Unexpected further sharp drop in oil price, and (ii) unexpected delays of projects on hand.

Source: Kenanga Research - 29 Sep 2016