1QFY15  core  profit  was  in  line,  accounting  for  24%  of  our/consensus estimates, supported by results from the OCSS unit and the inclusion of Seadrill  tender  rig business.  The  fabrication  segment was slow  in  the quarter due to tail-end of the projects, but we expect a pick-up in FY16F growth  aided  by  MYR1.3bn  EPCIC  contracts  won  for  wellhead platforms. Maintain forecasts and BUY, with SOP-based MYR5.33 FV.

• Within expectations.   SapuraKencana Petroleum (SAKP)’s   MYR334m 1QFY15  core  earnings  made  up  24%  of  our/consensus  estimates, excluding an  MYR178m acquisition gain of Sapurakencana Energy Inc (SKEI), which is the ex-Newfield.  The   offshore construction   &   subsea services   (OCSS)   division  booked   a   47%  PBT  surge  as  margins expanded  from  new  contracts  executed  during  the  quarter,  and favourable  results  were  recorded  by  SapuraAcergy  SB  (for  the completion of the Gumusut project),  despite lower contributions from the tail-end for the Gorgon Domgas pipeline installation (Domgas)   project. The drilling segment  recognized the inclusion of the tender rig business, which  overshadowed  a  fire  incident  that  caused  a  70-day  nonoperational work of the tender rig “West Menang”.
• Higher  orderbook  following  MYR1.3bn  EPCIC  contract  wins.  The group at the same time announced that it secured MYR1.3bn  worth of two  engineering,  procurement,  construction,  installation  and commissioning (EPCIC) contrats. The details: i) an EPCIC contract for three  remote  wellhead  platforms  in  the  North  Malay  Basin  by  Hess Exploration  and  Production  Malaysia  B.V.  (duration:  25  months,  from 2QCY14  to  3QCY16),  and  ii)  an  EPCIC  contract  for  four  wellhead platforms and associated subsea pipelines for JDA Block B-17 and B17-01  Field  Phase  3  Development  Project  by  Carigali-PTTEPI  Operating Company SB (duration: 39 months, from June 14 to 3QCY17).  We view these  positively as  they  now  bring  total orderbook to >MYR30bn (from MYR27bn)  through  to  2024.  Also,  the  fabrication  segment  is  likely  to benefit, but only at FY16 at the earliest, given the project timeline.   
• Maintain BUY   and  SOP-based MYR5.33   FV  implying a target FY16F P/E  of  18.4x  vs  other  big-cap  stocks  under  our  coverage  that  trade  at 14x-29x. We still like SapuraKencana as: i) we believe there is still much long-term  value  to  be  unlocked,  ii)  it  has  the  capability  to  properly manage another risk service contract (RSC), and iii) its relationship with Seadrill (SDRL NO, NR) continues to expand its geographical footprint.

We  still  like  SapuraKencana,  as  we  believe  there  is  still  substantial  value  to  be unlocked, especially from the gas fields that are yet to be developed. We also believe that  it  is  capable  of  clinching  another  RSC,  due  to  its  proven  track  record.  Also, SapuraKencana’s  relationship  with  Seadrill,  a  committed  long-term  investor  in  the former, may open inroads to places still foreign to the group (like Mexico). We value: i)  the  OCSS  and  fabrication  &  hook-up  construction  &  commissioning  (Fab  & HuCC) divisions at a target FY16 P/E of 20x (from 18x and 20x respectively), ie at  25%  premium  over  smaller  oil  &  gas  (O&G)  servicing  players  like  Dayang Enterprise  (DEHB  MK,  BUY,  FV:  MYR4.80)  and  Petra  Energy  (PENB  MK, NEUTRAL,  FV:  MYR2.71).  We  opine  that  such  a  premium  is  warranted,  as SapuraKencana  is  better  equipped  than  its  comparable  peers  of  similar businesses.  Most of  the assets  employed for  the  use  of  the  related  contracts are owned by the group,

ii)  the tender rig business, a sub-division of the energy and drilling (E&D) business at  27x  (from  35x),  similar  to  its  comparable  peer,  UMW  Oil  &  Gas  (UMWOG MK, NR), which is currently trading at 27x CY15,

iii)  the  existing  oil  producing  fields  of  Newfield’s  upstream  assets  at MYR0.12/share. We have imputed an estimated oil price of USD105.00/barrel vs current WTI price of USD106.71/barrel,

iv)  the 15-year Berantai RSC at MYR0.09/share using a WACC of 9%, and

v)  we include only a part  of the expected FY16 year-end total borrowings into our FV, ie MYR4.7bn out of MYR10.5bn. We believe about 55% of these loans are for  the  construction  of  the  PLSVs  and  the  development   of  the  Newfield  gas fields.  These  assets  are  not  expected  to  bear  any  contributions  to  the bottomline in FY15/16, Hence, we believe it fair to exclude these loans.

Source: RHB