SapuraKencana announced yesterday that it has won three engineering & construction and drilling contracts valued at a combined USD382m. Maintain BUY, with a SOP-based TP of MYR2.51 (36% upside). We think these awards support our view that these two segments would be the company’s earnings drivers in FY17. No change to our estimates, as the value of the contracts is within our orderbook replenishment buffer.

Salient details. SapuraKencana announced yesterday that it has won three separate contracts worth a total of USD382m. The first contract is a long-term service agreement for the comprehensive maintenance of General Electric (GE) turbo-machinery from Murphy Sarawak, while the second one is another long-term service agreement from Petronas Floating Liquefied Natural Gas (FLNG-1) for the maintenance of GE turbo-machinery as well. Both contracts are for a period of 10 years and will be fulfilled via a 51:49 JV with GE Oil & Gas. SapuraKencana also announced a contract extension for its SKD Jaya tender rig, operating in Trinidad and Tobago for BP. The extension will see SKD Jaya remaining on a contract until Apr 2016.

Strong start to 2016. YTD, SapuraKencana has won USD299m worth of contracts across its engineering & construction and drilling segments. The recent wins validate our view that its FY17 earnings could be driven by its engineering & construction and drilling divisions. We believe this demonstrates its resilience and competitiveness – even as the oil and gas services industry faces a challenging period of low crude oil prices. Our FY17 projection assumes a conservative USD380m worth of new contract wins. Risks. The risks to our forecast include lower realisable crude oil prices, a lower-than-expected production profile, as well as lower orderbook wins than what we estimated.

Maintain BUY, with a SOP-based TP of MYR2.51. As the total contracted amount falls within our new orderbook replenishment estimate, we make no changes to our earnings for FY17 and going forward. We continue to like SapuraKencana as we believe that in a low crude oil price environment, its engineering & construction and drilling segments would continue to drive earnings. The company’s energy division may have a low impact on earnings in FY17 due to the low crude oil price, while we expect production to remain at low levels.

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Source: RHB Research - 5 Feb 2016