We  maintain  BUY  and  a  MYR4.02  SOP  TP  on  SapuraKencana  (60% upside),  who  had  MYR1.45bn  contract  wins  (MYR710m  for  fabrication and  HuC,  MYR520m  for  OCSS  and  MYR350m  for  rigs)  last  Friday.  We view this positively as it will be an add-on to its MYR26.1bn orderbook, and  the  bulk  of  the  new  contracts  offer  visibility  for  FY17-FY19.  We retain earnings forecasts as the contract wins are within assumptions.   

Brief  details  for  MYR1.45bn  contract  wins.  SapuraKencana announced  last  Friday  that  it  secured  a  total  of  MYR1.45bn  contract wins.  The  brief  details  and  contract  tenures  are  as  follow:  i)  three contract  awards  for  the  fabrication,  hook  up  and  commissioning  (HuC) division, worth a total of  MYR710m (USD206m) and at least MYR480m of it will have a 4-year earnings visibility till end-FY19,  ii) three contract awards for its offshore construction and subsea division, worth a total of MYR520m  (USD151m)  and  at  least  USD120m  of  it  will  have  2-year earnings visibility till end-FY17, and iii) a contract extension for its semi-tender  drilling  rig  West  Experenza,  and  a  contract  award  for  SKD Alliance, both worth a total of MYR350m (USD102m) that will last till 1H 2016. Please see Page 2 for further details of the contract wins.   

We  view  the  contract  wins  positively,  as  they  now  bring  the  total orderbook  to  ~MYR28bn  (from  MYR26.1bn).  The  fabrication  division’s contract wins are in line with the company’s expectations of a ramp-up in this division’s activity. The group had again demonstrated its ability to be competitive in both domestic jobs (the contracts are for Baronia, Tukau, Tembikai,  and  Angsi  projects,  to  name  a  few)  and  overseas  jobs (contracts  for  Yadana  field,  Myanmar  and  Chevron  Wheatstone, Australia).  Despite  the  negative perception on Petronas’ plans to cut capex  by  15-20%,  these  contract  wins  reiterate  our  view  that  domestic capex for ongoing projects may resume. We note the domestic jobs are for  brownfield  and  fields  with incoming targets for  first  oil/  gas  between 2015-2017, and projects that were already long delayed since 2013.   

Contract  wins  within  orderbook  replenishment  assumptions.  We retain our earnings forecast, which is 6-10% below consensus. We had already  assumed  a  conservative  9%  drop  in  orderbook  replenishment and  a  10%  softening  in  day  rates  of  its  tender  rigs.  We  believe  it  is materially  exposed  to  risks  of  global  capex  rationalisation,  given  that current oil prices could defer and delay many unfeasible new projects.  

Maintain  BUY,  SOP  TP  of  MYR4.02  implies  16x  FY16F  P/E.  A  worst stress  test  scenario,  assuming  Brent  crude  at  <USD70/barrel  (bbl),  a 25%  cut  in  tender  rig  day  rates  and  an  absence  of  pipelay  long-term contracts from Brazil, will lead to a TP of MYR1.99. (See Page 3.)

More Details On The MYR1.45bn Contract Wins

Fabrication, Hook-Up And Commissioning (Fab and HuC) division.

SapuraKencana’s wholly-owned subsidiary, Kencana HL SB., has been awarded by Petronas  Carigali  SB  (PCSB)  with  Engineering,  Procurement,  Construction, Installation  and  Commissioning (EPCIC) for  BNJT-K  (Baronia)  and  TTJT-A (Tukau) Wellhead Platforms (WHP).    

- Approximate contract value: MYR480m 
- Expected completion: 4Q18 (contract tenure of 48 months).  KHL has also been awarded a contract for brownfield works on MDPP, MDB and JKB Platforms for Phase 3 Development Project by Carigali-PTTEPI Operating Company.  
-  Approximate contract value: USD26m 
-  Expected completion: 1Q16 (contract tenure of >1 year).  KHL  has  also  been  awarded  a  procurement,  construction  and  commissioning  contract for the Angsi compression module by PCSB. The management expects the MYR140m contract to be completed by 4Q15 (contract tenure of one year). 
-  Approximate contract value: MYR140m 
-  Expected completion: 4Q15 (contract tenure of one year). 

Offshore Construction And Subsea Services (OCSS) division 
SapuraKencana’s wholly-owned  subsidiary,  TL  Offshore  SB,  has  been  awarded  a contract  by  Vestigo  Petroleum  SB.  for  Transportation  and  Installation  (T&I)  of  the Central  Processing  Platform  (CPP)  for  the  Tembikai  (OIL)  Development.  The Tembikai Oil Project comprises transportation and installation of the CPP “Tembikai Oil” for the development of Tembikai Marginal field located approximately 150km east of Terengganu, Offshore Peninsular Malaysia.  
-  Approximate contract value: USD12.9m 
-  Expected completion: March 2015 SapuraAcergy (Australia) Pty Ltd, a wholly owned entity of SapuraAcergy SB., a joint venture company equally owned by SapuraKencana and Subsea 7 S.A. had entered into  a  sub-contract  with  Heerema  Marine  Contractors  Australia  Pty  Ltd.  The  sub-contract is for the provision of buoyancy tanks removal and disposal for the Chevron Wheatstone project which is located in Wheatstone field, Western Australia.  
-  Approximate contract value: USD18m 
-  Expected completion: Not provided. This is a subcontract SapuraAcergy SB has also been awarded with a contract from total exploration and production  (E&P)  Myanmar  for  the Engineering, Procurement, Construction, and Installation  (EPCI)  of  the  Wellhead Platform 4 and Lower Compression Platform, Pipelines and Cable, in Yadana Field, Offshore Myanmar.   
-  Approximate contract value: USD120m-130m 
-  Expected completion: 4Q16

Drilling division  
SapuraKencana’s wholly-owned  subsidiary,  SapuraKencana  Drilling  Holdings  Ltd, has been awarded a contract by Foxtrot International LDC, a company incorporated in Cayman Islands, whose main place of business activities is in Abidjan, Ivory Coast (Foxtrot) for the provision of its Semi-Tender Assist Drilling Rig SKD Alliance with an option to extend for a further three wells. Foxtrot intends to utilise SKD Alliance for its development drilling campaign offshore Ivory Coast.

- Contract tenure: 400 days from Feb 2015 
SapuraKencana’s  wholly  owned  subsidiary,  Seadrill  Esperanza  Limited,  has accepted a three month extension to its contract with Hess Equatorial Guinea Inc. for the provision of its Semi-Tender Assist Drilling Rig West Esperanza. Hess Equatorial Guinea  will  continue  to  use  West  Esperanza  for  its  development  drilling  campaign offshore Equatorial Guinea.  

- Contract tenure: Sep - Dec 2015

Source: RHB