SapuraKencana  Petroleum  (SAKP)’s  9MFY14  core  net  profit  surged 65.8%  y-o-y,  in  line  with  our  expectations  but  below  consensus.  The improvement  was  largely  due  to  the  inclusion  of  Seadrill’s  tender  rig business  during  this  period.  We  maintain  our  FY14-15  earnings estimates and BUY call  on SAKP, with our  FV  unchanged  at  MYR4.96, pegged to a target FY15 P/E of 22x.

• 9MFY14 core net earnings jumped 65.8% y-o-y. SAKP’s 9MFY14 core net  earnings  of  MYR680.1m were  in  line  with  our  estimates  but below consensus,  making  up  74%  and  66%  of  the  respective  full-year forecasts.  The  y-o-y  improvement  was  mainly  due  to  the  inclusion  of Seadrill’s tender rig business. The drilling & energy services segment  –the only segment  with  improved  profit before tax (PBT)  –  saw  9MFY14 revenue  and  PBT  soar  188%  and  193%  y-o-y  respectively.  Interest expense  surged  111%  y-o-y  due  to  a  significantly  higher  drawdown  of revolving  credit  and  term  loans  totaling  MYR5.56bn  (vs  MYR2.99bn  in 9MFY13).  9MFY14  net  gearing  stood  at  1.1x  vs  0.8x  in  9MFY13,  with short-term borrowings accounting for 71% of total borrowings.   
• May incur higher borrowing costs  in  CY15.  In October,  SAKP signed a  sale  &  purchase  agreement  with  Newfield  International  Holdings  Inc (Newfield)  to  acquire  the  latter’s  upstream  assets  in  Malaysia  for USD898m (MYR2.85bn). The acquisition,  80%  financed by borrowings, may  increase  SAKP’s  net gearing to 1.3x when concluded  by 1QCY15. We have yet to factor this into our earnings model as the acquisition cost may  vary  while  the  fields’  production  sharing  partners  have  yet  to exercise their preferential rights to acquire the assets.
• Three  T&I  packages  in  the  bag?  Upstream  recently  reported  that SAKP won three out of five packages from  the  Pan Malaysian transport & installation (T&I) tenders. While the value of  the  three packages is  not known,  we believe  that the five packages  are  worth  more than  MYR3bn combined. We have  incorporated some  MYR3bn and MYR4bn worth of contract wins for FY14 and FY15 respectively.
• Maintain  BUY,  MYR4.96  FV.  We  keep  our  FY14  and  FY15  EPS estimates  unchanged  and  maintain  our  BUY  call  on  SAKP,  with  an unchanged  FV  of  MYR4.96.  This  is  based  on  a  22x  FY15  P/E,  at  a premium  over  its  regional  peers  owing  to  the  group’s  strong  earnings growth and market dominance. The inclusion of earnings from Newfield’s acquisition, once completed, will provide more earnings upside.

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Company Profile
SapuraKencana Petroleum is an  integrated oil & gas service provider with full -fledged engineering, procurement, construction, installation and commissioning (EPCIC) capabilities.

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Source: RHB