SapuraKencana ended the year with a total impairment of MYR2bn, as it provided for its oil & gas assets amid the falling crude oil price. We expect its engineering and construction (E&C), drilling and Brazil operations to continue to drive earnings while contribution from its energy segment should remain marginal. Maintain BUY with a lower SOP-based TP of MYR2.42 (from MYR2.51, 27% upside).

E&C and drilling segments continued to drive earnings for SapuraKencana Petroleum (SapuraKencana). We expect these segments to contribute 74% of FY17 (Jan) operating profit, armed with an orderbook of MYR18bn and term contracts.

Early start for Brazil. Sapura Onix was delivered two months ahead of schedule while Sapura Jade was delivered in Feb 2016, bringing the total number of operational vessels to four. Two more vessels are expected to be delivered in 2H16.

Energy. It did not come as a surprise that the energy segment’s impairments came up to MYR1.3bn. For FY17, low oil prices and low production numbers from the energy segment should lead to marginal earnings for the segment. Earnings revision and risks. We upgrade FY17F-18F earnings by 5% given an early start of its Brazil operations. Lower orderbook replenishment and unexpected contract cancellations remain the key risks.

Source: Company data, RHB Maintain BUY with lower TP of MYR2.42. E&C and drilling would continue to be the main growth drivers for SapuraKencana in FY17 and contribution from its energy segment should remain marginal. Maintain BUY with a lower TP of MYR2.42 (from MYR2.51), as we adjust our MYR/USD assumption to 4.12 from 4.24.

Financial Exhibits

As expected, E&C continued to be the main earnings driver for SapuraKencana as it encompasses both international and Malaysia operations and contributed 55% of FY16 revenue (international: 29%, Malaysia: 26%). Armed with an orderbook of USD1.2bn, we still expect the segment to contribute the bulk of its earnings going ahead. In FY17, E&C is expected to make up 76% of total revenue and 40% of EBIT. In FY16, MYR200m was impaired from the E&C segment for its offshore support vessel, yard improvements and assets that were underutilised.

Drilling made up 29% of FY16 revenue and 34% of operating profit. While the outlook for the drilling market looks bleak, SapuraKencana is relatively sheltered as only five of its 16 rigs are not utilised while others are on term contracts. We expect drilling to contribute 20% of FY17 revenue and 39% of EBIT. MYR400m was impaired from the drilling segment for older rigs that would face difficulties in winning jobs as well as two mobile offshore production units (MOPU). Recall that one of the MOPUs was converted to a security sea base off the coast of Sabah, Malaysia.

SapuraKencana’s Brazil operations are one of its star performers in 4QFY16. There are currently four operational vessels in Brazilian waters, after Sapura Onix was delivered two months ahead of schedule and Sapura Jade was delivered in Feb 2016. Two more vessels, Sapura Esmeralda and Sapura Rubi, are expected to start operations in 2Q16 and 3Q16 respectively. Our earnings upgrade for FY17 comes mostly from the earlier delivery of the new vessels. No impairments came from the Brazil operations and receivables were paid on time within 30 days of invoicing.

Energy. SapuraKencana lifted 4.8 million barrels of oil equivalent (mmboe) at an average lifting price of USD52 per bbl in FY16. In FY15, it lifted 5.1mmboe at an average lifting price of USD94 per bbl. The energy segment contributed 16% of FY16 revenue and only 7% of operating profit. In FY16, SapuraKencana also received a field development plan approval for SK310 B15 with first gas targeted for 4Q17. The energy segment was hit by the bulk of impairments in FY16 totalling MYR1.3bn. With the oil price stabilising, we expect the energy segment to remain a support for SapuraKencana’s other segments. Given low oil prices and lower production numbers, we expect the energy segment to contribute 3% of FY17 revenue and 1% of operating profit.

Maintain BUY. We believe that SapuraKencana’s worst year – with impairments from the energy segment in FY16 wiping out the outperformance of the E&C and drilling segments – is likely to be over. We maintain our view that as the earnings contribution from the energy segment would be marginal amid low oil prices and low expected production numbers, more weight should be placed on its E&C and drilling segments, which have been doing well. We maintain our BUY recommendation with a lower SOP-based TP of MYR2.42 (from MYR2.51), as we take into account our new MYR/USD assumption of 4.12.

SWOT Analysis

Source: RHB Research - 28 Mar 2016