SKPETRO?s 9M17 results came in above expectations with better-than-expected contributions from its E&C segment. However, we expect a seasonally weak 4Q17 to be in the red, possibly dragged by stubbornly high fixed cost. We upgraded FY17E earnings by 8% while maintaining FY18E earnings. All in, we keep our MARKET PERFORM call with an unchanged TP of RM1.48 pegged to 0.7x FY18E PBV.

Above expectations. In 9M17, SKPETRO booked in core net profit of RM327.1m which is above expectations, accounting for 167%/154% of our/consensus full-year estimates. The positive deviation is largely due to stronger-than-expected contribution from the E&C segment. No dividend was declared as expected.

Better E&C contribution QoQ. Sequentially, 3Q17 earnings strengthened by 36% to RM135.7m from RM75.0m in 2Q17 in tandem with a 33% increase in overall revenue due to better contribution from E&C segment (PBT jumped 1.3x QoQ). However, it was partially offset by weaker drilling and energy segment. Energy segment earnings contribution fell to RM1.8m from RM6.0m QoQ due to lower average lifting oil prices at USD46/bbl vs. USD48/bbl and lower production of 0.8mmboe vs. 1.3mmboe in 2Q17.

Still weaker contribution YoY. On YoY basis, earnings fell 46% from RM249.6m in 3Q16, in line with a 23% decline in top line, largely marred by weaker contributions across all divisions. However, this is partially offset by lower tax expense helped by a decline in effective tax rate to 21% from 34% in 3Q17 as well as higher earnings from PLSVs chartered to Petrobras. Cumulatively, core net profit fell 62% to RM327.1m from RM850.4m in 9M16 due to weakening revenue and margins for all three segments (overall PBT margins of 7.9% in 9M17 vs. 17.2% in 9M16).

Tender book increased. SKPETRO?s latest order-book weakened slightly to RM17.2b from RM17.7b in 2Q17, mainly comprising tenders for its E&C division. The company expects RM2.0b and RM4.9b to be recognised in the remaining 4Q17 and FY18, respectively. Tender book increased to USD7.5b from USD6.0b from 2Q17 mainly due to higher tender queries from oil majors.

Upgrade FY17 earnings. Despite 9M17 earnings accounting for 167% of our full-year forecast, we only upgrade our FY17E earnings by 8% to RM212.2m factoring higher revenue from E&C segment. This is because we expect SKPETRO to sink into the red in 4Q17 dragged by stubbornly high fixed cost amidst lower revenue recognition from E&C segment. We are maintaining our FY18E earnings in view of no improvement from the weaker drilling segment as well as lower contribution from E&C segment.

Keep 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 - 09 Dec 2016