FY14 results were at just 73/89% of our/consensus estimates  on  lesser contributions  from  SAKP’s  OCSS  unit,  and  high  interest  and depreciation costs. We anticipate softer 1HFY15 earnings due to lowerthan-expected  contributions  from  its  drilling  unit  and  a  slowdown  in Petronas job orders. We maintain our FY15/16 forecasts,  BUY call  and SOP-based MYR5.61 FV.

• Below expectations.  SapuraKencana Petroleum (SAKP)’s  MYR892.5m FY14 core earnings made up only 73%/89% of our/consensus estimates. This was  mainly on  lower-than-expected overall profit  from the  offshore construction  &  subsea services  (OCSS)  division,  which  booked  a  27% PBT dip  on a contributions decline recognised from the Gorgon Domgas pipeline  installation  (Domgas)  project.  The  OCSS  wing  also  booked higher-than-anticipated  depreciation  costs  arising  from  the  inclusion  of tender rigs into SAKP’s total assets. We note that FY14 interest expense was  95%  higher  vs  FY13’s,  in  line  with  net  gearing  increase  as  it  did more  bank  borrowing  drawdown  during  the  year,  As  at  end-Jan  2014, 92% of total bank borrowings were longer-term in nature vs FY13’s 60%.    
• OCSS the main culprit. This division booked a 57%/88% PBT drop on a y-o-y/q-o-q basis as the Domgas project neared completion.  We believe its fabrication and hook-up & commissioning  business  has not received any contributions  from the transport  and  installation project awarded by Petronas  in  late  2013  on  work  orders  slowdowns,  hence  the  weakerthan-expected performance.    
• 1Q-2QFY15  results  expected  to  be  weak.  Our  check  with  industry source Riglogix revealed that five tender rigs within SAKP’s fleet are >30 years  old.  We  believe  they  may  be  retired  soon.  We  opine  that  the monsoon  season  may  also  affect  the  execution  of  the  transport  and installation  contract awarded by Petronas late Dec 2013, hence affecting FY15 earnings.
• Maintain BUY  with an unchanged SOP-based MYR5.61  FV. We keep our FY15/16 numbers intact  pending an analyst briefing later today.  We have  not  included  the  estimated  contribution  from  the  newly-acquired Newfield upstream assets into our earnings forecasts.  We expect lower interest  costs  going  forward  following  its  debt  reorganisation.  We  are also cautious on near-term  share price performance on market concerns over  the  stock  potentially  being  regarded  as  non-shariah  under  the Securities Commission’s definition.

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SapuraKencana Petroleum (SAKP) is an integrated oil and gas services and solution provider.

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Source: RHB