We downgrade SapuraKencana to NEUTRAL and cut our TP to MYR2.20 (+6% upside, 10x P/E) from MYR4.02. Our TP takes into account weaker E&P contributions in FY16F (at a lower oil price assumption) and risks of  orderbook  replenishment  for  services  and  rigs  internationally.  Our stress  test  scenario  implies  that  the  stock  will  continue  to  face  weak sentiment and downside risks that could lower our TP to MYR1.99.  

Brief  profile.  SapuraKencana  provides  integrated  upstream  services and  is  involved  in  exploration  and  production  (E&P).  It  has  four  main units:  fabrication,  hook-up  and  commissioning  (HuC)  with  125k  million tonnes  per  annum  (MTPA)  capacity,  offshore  construction  and  subsea services (OCSS) (fleet has six pipelaying vessels for Petrobras), drilling (17  active  tender  and  semi-tender  rigs)  and  energy/E&P  (production-sharing blocks, a marginal field and a brownfield development).  

Outlook, forecast changes. The group has a cumulative MYR26bn firm orderbook  (and  MYR19bn  optional).  Our  concerns  remain  on:  i) orderbook replenishment given its sizeable international exposure (~70% of  orderbook  are  for  overseas),  ii)  security  of  cash  flow  from  Petrobras contracts (at the JV level), iii) ~40% of its 17 operational rigs are up for renewal  (three  rigs  by  FY16;  3-4  rigs  by  FY17),  and  iv)  1HFY16  could see a weaker E&P division if Brent remains at USD65-70/bbl. We lower our FY16F/FY17F core profit forecasts by 7%/4%, which are now 7-11% below consensus. We expect weaker FY16F E&P earnings due to lower oil  prices,  and  a  lesser  orderbook  replenishment  rate  for  its  services given its international exposure. Our new oil price assumption for 2015 is USD75-85/bbl (maintain USD90-100/bbl for 2016/2017).   

Downgrade  to  NEUTRAL,  TP  drops  to  MYR2.20  (from  MYR4.02), implying 10x FY16F P/E. We believe this factors its execution risks and outlook  for  contract  wins,  when  the  feasibility  of  many  global  upstream projects and contracts are at risk as current oil prices of <USD65/bbl vs breakeven costs becomes a real challenge. Our SOP comprises: i) E&P: MYR0.91/share DCF for Malaysia and Vietnam’s producing fields (from MYR0.96/share),  ii)  EV/EBITDA  of  5x  for  OCSS  (from  10x,  to  reflect significant counterparty risks) and tender rig divisions (from 6x, to reflect risks of contract renewals), and iii) 8x P/E for fabrication/ HuC, from 15x. 

Stress test scenario, assuming Brent crude at USD40/bbl, a 25% cut in rig day rates and cancellation of pipelay contracts from Brazil, will derive a  MYR1.99  TP  (implied  9x  P/E).  A  scenario  of  a  sustained  uptrend  of Brent crude to USD90-100/bbl and recovery in orderbook replenishment activities could boost our TP to MYR4.02 (implied 18x P/E).

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Financial Exhibits

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Company Profile

SapuraKencana Petroleum is an integrated oil & gas services and solutions provider.

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Source: RHB