SKPETRO is on track to replenish its order book with three newly secured contracts (2 E&C and 1 drilling contracts) totalling RM889m, bringing its YTD win to RM4.2b. However, we make no changes to our earnings forecasts as the contract win is still deemed within our order book as well as drilling utilisation assumptions. Maintain MARKET PERFORM call with unchanged TP of RM1.48 pegged to 0.7x FY18 PBV due to minimal near-term catalysts.

Three contracts totalling RM889m. Last Friday, SKPETRO announced three contracts award with a combined value of approximately USD215m (equivalent to RM889.0m). The firm contract period of these contracts varies from three months to two years, spanning until FY20.

2+2 drilling contract awarded. We are positive on the news as it showcased the strength of SKPETRO winning contracts continuously under such challenging environment. Brunei Shell Petroleum Sdn Bhd awarded a 2+2 year contract to utilise SKD Pelaut as a bespoke technical solution for its development drilling campaign offshore Brunei. Recall that SKD Pelaut has been working with Shell Brunei for more than 20 years and the existing contract will expire by 1QCY17. We believe the new firm contract will commence from then and end by 1QCY19. Although the respective contracts’ values were not disclosed, we understand that there is no rate adjustment on the DCR. Thus, we estimate the DCR is likely to hover around USD120k/day valuing the 2-year drilling contract at >USD80m.

EPCIC of B127 Cluster Pipeline RTR Project. SKPETRO also secured the engineering, procurement, construction, installation and commissioning (EPCIC) of 11 pipeline systems and associated topside modifications in relation to the B127 Cluster Pipeline RTR Project from Oil and Natural Gas Corporation Limited (ONGC) for 20 months. We expect the work to be carried out in Lumut fabrication yard. Assuming contract value of RM513.0m and margin of 15%, the project could contribute a PBT of RM76.9m to FY17-19 bottom line. Lastly, the third contract award is the provision of underwater maintenance services for Sepat MOPU by Petronas Carigali Sdn. Bhd involving inspection, maintenance, repairs, drilling support and other work at the Sepat MOPU field for two months. We anticipate minimal earnings impact to SKPETRO from the project at RM0.7m (0.3% of FY17 PBT) assuming 8% margin.

No changes to our FY17-18E earnings forecasts. With the latest win of RM889m, this brings the YTD win to RM4.2b which surpassed our total group order book (including both drilling and E&C segments) assumption of RM4.0b in FY17. However, we are still maintaining our FY17-18E earnings estimates, as the drilling contract which commence only in FY18 is within our order book assumption for drilling segment for FY18.

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 nearterm 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 - 4 Oct 2016