We are positive on the nine newly secured contracts which reaffirm SARNRG’s competitiveness in the industry. However, we make no changes to our earnings forecasts as the wins are within our order-book replenishment target. Reiterate OUTPERFORM call on the counter with an unchanged TP of RM0.770, pegging to FY19E PBV of 0.5x.

Sizeable haul. Yesterday, SARNRG announced that they have secured nine new contracts worth a combined value of RM1.8b. These contracts from Malaysia, Australia, Mexico and India comprise works from its E&C and drilling segment with contracts periods varying from three months to two years (refer overleaf for further breakdown of contracts).

Seven E&C contracts. Overall, we are positive on the contracts which demonstrate SAPNRG’s ability to win contracts continuously amidst the competitive environment. As expected, SAPNRG had secured two EPC contracts to build three wellhead platforms and one integrated module for block SK408 in which they have a 40% working interest in the Production Sharing Contract (PSC). The other E&C contracts from India, Mexico and Australia comprise works on: (i) wells and pipeline replacement, (ii) construction and modification of Berths, (iii) EPCIC for 20km of pipelines, and (iv) lightwell intervention services. All in, we think these E&C projects could fetch EBITDA margins of c.15-20% which is in line with historical FY18 margin of 16%.

Two drilling contracts. In addition to the E&C contracts, SAPRNG has secured two drillings contracts involving their (i) ‘Sapura Berani’, and (ii) ‘Sapura Esperanza’ drilling rigs. Sapura Berani will be utilized by Petronas Carigali S/B for drilling of 3 firm wells and an option to extend for additional 2+3+2 wells in Malaysian waters. The second drilling contract is an extension of contract by Shell for ‘Sapura Esperanza’ which would be used to drill three firm wells with option for another three wells in Sarawak and Terengganu. Note that we have imputed utilization rates of 40-50% in FY19-20E for SAPRNG’s drilling segment.

FY19-20E forecasts unchanged. With the new contracts totalling RM1.8b (outstanding order-book of c.RM17b), total contracts secured YTD is at RM4.5b, which is still within our FY19E assumption of RM5.5b (accounting for 82%). Therefore, we make no changes to our FY19-20E earnings forecasts.

Reiterate OUTPERFORM call. Following the awards, we reiterate our OUTPERFORM call on the stock with unchanged TP of RM0.770 pegged to PBV of 0.5x. Our call is premised on better contract flows backed by the stronger crude prices and potential monetisation of E&P assets. Downside risks to our call include: (i) weaker-than-expected margins, (ii) lower-than-expected contract replenishment, and (iii) contract termination.

Source: Kenanga Research - 22 Jun 2018