We are positive on the four contracts secured, which reaffirms SKPETRO’s competitiveness, especially when the company could potentially be the only contender for Pan Malaysia T&I jobs. No changes to our earnings forecasts as the contract wins are within our order-book assumptions. Following that, we reiterate our OUTPERFORM call on the stock with higher TP of RM2.09 pegged to 1.0x FY18E PBV.

Four contracts award totalling RM433.6m. Yesterday, SKPETRO announced four contracts award with a combined value of approximately USD97.4m (equivalent to RM433.6m). The firm contract period of these contracts varies from 5 to 33 months, spanning until FY20. We expect these jobs to start contributing in 2Q18.

1-year Pan Malaysia T&I contract. We are positive on the news as it demonstrates its ability to win contract continuously amidst the competitive environment. Petronas has awarded an umbrella contract for the provision of Pan Malaysia Transportation and Installation of Offshore Facilities for one year. Recall that SKPETRO was one of the incumbents for such contract. Given the reduction of contract size as a result of industry slowdown in the past few years, SKPETRO could be the only contractor for this project this year. Although the contract value was not disclosed, we reckon that the bulk of the combined contract value of RM433.6m is attributable to this project, fetching EBITDA margin of c.25%.

Bagged three other E&C contracts. SKPETRO also secured two contracts from Petronas Carigali Sdn Bhd to provide EDPCIC and repair work for Sepat Mobile Offshore Production Unit Stabilization and provide PCC work off Full Well Stream Air Cooler Module on Central Processing Platform NC3CP-A. Meanwhile, SKPETRO also bagged Engineering, Preparation, Removal and Disposal for Dana and D30 Facilities Decommissioning Project by PCPP Operating Company Sdn. Bhd. 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 as this first contract win of RM433.6m (approximately 3% of the estimated 4Q17 outstanding order-book of RM16.3b) in FY18 is well within our current year assumption of RM4.5b. Note that SKPETRO is announcing its 4Q17 results this month and we are anticipating an operating loss dragged by seasonality resulting in slower work orders.

Maintain OUTPERFORM call. We are increasing our target price to RM2.09 from RM1.88, pegged to higher FY18E PBV of 1.0x (from 0.9x PBV) in view of: (i) its competitive advantage in winning local and overseas contracts continuously, and (ii) lower impairment risk on O&G assets backed by stabilisation of oil prices. 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.

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

Source: Kenanga Research - 03 Mar 2017