We  remain  positive  on  SapuraKencana  Petroleum  (SAKP)’s  medium term  earnings  outlook  even  though  the  company  announced  a seasonally  weaker  1QFY14 net  profit  last  Friday.  Given  its  MYR25.9bn-strong orderbook and its ability to capture value-accretive opportunities regionally,  we  reiterate  our  BUY  call  on  the  stock,  with  an  unchanged FV of MYR4.96, pegged to 22x FY15 EPS.  

- Forex  losses  drag  down  1QFY14  numbers.  SAKP’s weaker 1QFY14 results were mainly due to: i) forex losses amounting to MYR49m, and ii) lower  revenue  from  its  fabrication  and  hook-up  and  commissioning activities.  Management  told  analysts  at  yesterday’s conference call that of  the  MYR49m  loss,  MYR30m  comprised  realized  losses  mainly attributed  to  the  strengthening  of  the  MYR  against  USD  (its  rigs  are chartered out in USD) while the remainder comprised unrealized losses. 
However, things may turn around in 2QFY14 as  the MYR  weakened vs USD  during  the  current  quarter.  We  also  note  that  the  Group’s fabrication projects posted weaker revenue due to its clients’ changes in the scope of work and timing moving closer to 3Q13.  

- Incurs  MYR150m-MYR160m  cost  in  Seadrill  acquisition.  We understand  that  SAKP  recognized  some  MYR40m  in  costs  in  its  share premium  account  for  expenses  related  to  its  recent  placement  to  fund the acquisition of Seadrill, as well as merger costs. The remaining cost is likely to be amortized throughout the rest of the year.

- Tenderbook value equivalent to orderbook. Management also said it intends to bid for the upcoming transportation and installation tenders in the  Pan-Malaysia  fields  worth  MYR3bn.  It  is  also  close  to  wrapping  up negotiations for a fabrication job relating to a central processing platform.  

- Maintain  BUY.  All  in,  we  reiterate  our  BUY  call  on  SAKP  given  the Group’s  strong  earnings  prospects  in  the  medium  term.  We  are projecting  a  FY13-FY16  net  profit  CAGR  of  41.9%  backed  by:  i)  a MYR25.9bn-strong  orderbook,  ii)  potential  for  MYR3bn  worth  of transportation  and  installation  contracts  in  the  Pan-Malaysia  fields,  iii) MYR1bn-MYR2bn  worth  of  subsea  contracts,  and  iv)  new  engineering, procurement,  construction,  installation  and  commissioning  (EPCIC)  and enhanced oil recovery (EOR) developments. Our FV remains unchanged at MYR4.96, pegged to 22x FY15 EPS.

Source: RHB