SapuraKencana  Petroleum  (SAKP)’s  1QFY14  net  profit  came  in  below our and consensus full-year forecasts, mainly due to higher net foreign exchange  losses  and  lower  revenue.  We  expect  the  Group  to  perform better in the upcoming quarters, bolstered by the inclusion of Seadrill’s rig  earnings  and  anticipated  improvements  across  its  business divisions. Maintain BUY, with an unchanged FV of MYR4.96, pegged to 22x FY15 EPS.

- Weaker  than  expected.  SAKP’s  1QFY14  net  profit  (-24.4%  q-o-q, +124.9% y-o-y) fell short of our and consensus expectations, accounting for  merely  8.7%  and  9.2%  of  both  full-year  estimates  respectively.  The weaker-than-expected  earnings  were  mainly  attributed  to  a  drop  in revenue (-17.1% q-o-q, +138.0% y-o-y) as well as net foreign exchange losses amounting to MYR49.4m.  

- Weaker q-o-q. The q-o-q decline in 1QFY14  revenue was due to lower fabrication and hook-up and commissioning activities (-22.9% q-o-q), as well as weaker revenue from drilling, geotech and maintenance services (-22.6% q-o-q).  

- Still  positive.  We  expect  SAKP  to  perform  better  in  the  upcoming quarters,  bolstered  by  the  inclusion  of  Seadrill’s  rig  earnings  and anticipated improvements across its business divisions. However, we are cutting our FY14 earnings estimate by 15.4% to incorporate the weaker earnings in 1QFY14, but retain our FY15 and FY16 earnings forecasts.

- Maintain BUY.  We reiterate our BUY recommendation on SAKP for the group’s strong earnings prospects in the medium term. The stock’s near-term  catalysts  include  potential  projects  such  as:  i)  MYR3bn  worth  of transportation  and  installation  contracts,  ii)  MYR1bn-MYR2bn  worth  of subsea contracts, and iii) a new risk-sharing contract. We value the stock at MYR4.96, pegged to 22x FY15 EPS.

Source: RHB