We are positive on the five contracts win (1 drilling contract & 4 E&C jobs) as it demonstrates its ability to replenish order book continuously. 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. Reiterate OUTPERFORM call with unchanged TP of RM1.88 pegged to 0.9x FY18E PBV for being a good proxy to ride on the gradual recovery of the sector. Five contracts award totalling RM1.3b. Yesterday, SKPETRO announced five contracts award with a combined value of approximately USD300m (equivalent to RM1.3b). The firm contract period of these contracts varies from few months to five years, spanning until FY24.

5+5 drilling contract awarded. We are positive on the news as the company is maintaining its contract win momentum. Brunei Shell Petroleum Sdn Bhd awarded a 5+5 year contract to utilise SKD Alliance. Recall that SKD Alliance was working with Foxtrot and was cold stacked when the contract ended in 3QCY16. The new firm contract will commence in April CY18 for the next five years with options to extend for additional five years. Although the respective contracts values were not disclosed, we estimate the DCR is likely to hover around USD130k/day valuing the 5-year drilling contract at >USD200m.

Bagged four other E&C contracts. SKPETRO also secured two contracts from Petronas Carigali Sdn Bhd to provide underwater services and soil investigation services at both Peninsular Malaysia operations and Sarawak/Sabah operation area. Meanwhile, SKPETRO’s wholly-owned subsidiary, SapuraKencana TL Offshore Sdn. Bhd. also bagged two installation works for CPP Jacket and Bridge for BARDEGG-2 and Baronia Enhanced Oil Recovery (EOR) Development Project from Hyundai Heavy Industries and transportation and installation of pipeline, substructure and topside for Bunga Pakma Development Project from Repsol Oil & Gas Malaysia Limited, respectively. We anticipate that the project margin is in line with its international E&C project margin at mid-teens. (Refer table below for contract details.)

No change to our FY17-18E earnings forecasts. With the latest win of RM1.3m, this brings the FY17 YTD win to RM5.5b which surpassed our total group order book (including both drilling and E&C segments) assumption of RM5.0b in FY17. However, we are still maintaining our FY17-18E earnings estimates, as the drilling contract which will commence only in FY19 is within our order book assumption for drilling segment for FY19.

Maintain OUTPERFORM call. We are maintaining our target price at RM1.88, pegged to 0.9x FY18E 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. Furthermore, SKPETRO is a good proxy to ride on the gradual recovery of the sector given: (i) the company being the largest integrated oil and gas services player in Malaysia in terms of market capitalisation, and (ii) its oil production profile, which is directly related to stronger oil prices.

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

Source: Kenanga Research - 10 Jan 2017