While consensus are looking at a weaker set of results in 4Q17 driven by weaker earnings from E&C and drilling segments masking potential stronger performance from energy division backed by higher crude prices; SKPETRO, in our view, remains the best proxy to trade the volatility in oil prices and ride on the gradual recovery of the sector. Maintain OUTPERFORM on the stock with unchanged TP of RM2.09/share, pegged to 1.0x FY18E PBV. Expected to register core losses in 4Q17. SKPETRO is expected to announce its 4Q17 results end of March and we/consensus are forecasting net losses ranging from RM71m to RM115m based on our/consensus full-year forecasts, largely driven by weaker performance from E&C and drilling segments offsetting potential stronger performance from energy segment in view of stronger crude oil prices.

E&C expected to be the main drag. E&C segment registered RM274m PBT with RM1.6b revenue in 3Q17. With depleting order- book resulting in lower revenue, we believe the drop in PBT margin was significantly largely due to depreciation cost in 4Q17. Meanwhile, drilling segment is also likely to be weaker QoQ as two rigs (Jaya and Alliance) were off hire in 4Q17.

Stronger QoQ energy earnings. SKPETRO lifted 0.8mmboe at average crude lifting price of USD6/bbl, bringing its 9M17 production to 3.2mmboe. Should SKPETRO is able to meet its full-year production guidance of 4.0mmboe in FY17, 4Q17 production is likely to stay flattish at c.0.8mmboe. Hence, we expect the segmental earnings to remain profitable and improve QoQ (from RM2m PBT in 3Q17).

Stable earnings from Brazil. SKPETRO’s remaining order-book recognition guidance for 4Q17 stood at RM2.0b which includes RM0.6b for JCE portion which is largely attributable to contract of the 6 PLSVs chartered to Petrobras. Note that the last vessel, Sapura Rubi has been delivered to Petrobras on 14 August 2016 and all 6 vessels have been operating at an average utilisation rate of 98% in 3Q17. Hence, we foresee these vessels to operate and contribute stable earnings at its JV & associate level.

No change to our FY17-18E earnings forecasts pending 4Q17 results announcement end of the month. Our FY17 earnings forecast of RM212.2m is 15% lower than consensus number of RM249.2m as we believe the sharp decline in profitability is due to high operating leverage. Meanwhile, we expect minimal impairment on O&G assets backed by stronger oil prices.

Maintain OUTPERFORM call. SKPETRO is constantly embarking on cost optimisation and this could result in lower cost base going forward. All in, we are maintaining OUTPERFORM call on the stock with an unchanged target price of RM2.09 pegged to FY18E PBV of 1.0x PBV, in view of: (i) its competitive advantage in winning local and overseas contracts continuously, and (ii) 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 - 27 Mar 2017