The  group’s  9MFY15  core  profit  was  in  line  with  our  estimates  albeit below consensus. Maintain BUY and TP of MYR4.02 (+64% upside), with stress  test  scenario at MYR1.99. We attribute the good performance to better rig utilisation and stable profits from energy and OCSS. We retain our earnings forecasts as we expect seasonally weak OCSS towards 4Q and weaker E&P contributions in FY16 from the oil price slump. 

Deemed in line. SapuraKencana’s MYR1.03bn 9MFY15 core earningswere  in  line  with  our  estimates  albeit  below  consensus  (81%/72%  of our/consensus forecasts), as we expect potential challenges towards 4Q and  beyond,  which  implies  that  consensus  may  need  to  be  lowered (further  details  below).  Offshore  construction/ subsea services (OCSS) enjoyed  higher  margins  from  full-cost  savings  on  its marine  assets  vs  FY14’s  mobilisation  and  third-party  charter  for  Pan Malaysia  jobs,  despite  lower  revenue  QoQ  as  1HFY15  was  the  peak activity.  Drilling  division  saw  16  out  of  17  of  its  operational  rigs  active (hence higher utilisation from 1HFY15), with only  Teknik Berkat  awaiting for a contract. The  energy  division recorded healthy profits in 9MFY15 due  to  the  favourable  crude  oil  environment.  We  also  understand  that charter payments had been promptly received by the two pipelay vessels currently working in Brazil, though profits are still small in the JV line. A positive surprise was its announcement of a 2 sen interim dividend.

Outlook.  The group has a cumulative MYR26.1bn orderbook (including the MYR1.5bn contracts secured last week), and expects more positive results from fabrication tenders in the domestic market. It also shared its capex  plans  for  the  next  three  years  -  unchanged  from  a  year  ago despite  the  oil  price  slump  –  which  largely  encompasses  development and drilling (oil : MYR100m per year, gas: MYR400m-500m per year).

Forecast  retained.  Our  earnings  forecasts  remain  conservative  at  3-10%  below  consensus,  accounting  for:  i)  a  seasonally  weak  4Q  in  its OCSS  division,  especially  given  the  peak  1HFY15  activity,  ii)  slight weakness in energy division in 4Q as the November lifting had enabled itto capture  the sale price at ~USD80-85/bbl,  (1HFY16 could see further headwinds if Brent remains at USD65-70/bbl), and iii) three  rigs are up for renewal by FY16; 3-4 rigs by FY17, against its 17 operational rigs.

Maintain  BUY,  SOP  TP  MYR4.02  implies  16x  FY16F  P/E,  though  we expect  consensus  to  further  trim  TPs  given  the  weakened  short-term sentiment. A stress test scenario, assuming Brent crude <USD70/bbl,  a 25% cut in rig day rates and no pipelay contracts from Brazil, could bring to a TP of MYR1.99 (implied 12x P/E). Execution remains a key risk.

Conference  call  takeaways.  Management  carried  out  a  conference  call  after  the release of the quarterly results:

Firm orderbook of MYR26.2bn as at  Dec 2014 (which included the MYR1.45bn contracts  secured  last  week),  relatively  unchanged  from  last  quarter.  Tenders are still existing for MYR4bn-5bn worth of fabrication and hook-up projects 

50%  of  its  JV  profit  was  from  OCSS  –  majority  from  SapuraAcergy  (mainly Australia  Gorgon  project  for  the  period  and  further  work  in  Wheatstone, Australia)  and  the  other  50%  from  Energy  -  FPSO  Berantai.  The  two  Brazil pipelay  vessels  were  profitable,  but  were  offset  by  an  accounting  method  that requires pre-operating expenses to be front loaded.

Among  the 17  operational  rigs  in 3QFY15,  Teknik  Berkat  is  the only one with no contract.  The  group  had  disposed  T4  and  T3  which  were  deemed  as  noncompetitive units.  Also, T6 and T7 are not part of the 17 rigs as they are aged >30  years  old.  The  company  is  retaining  them  for  strategic  decisions.  We understand that three rigs are up for renewal by FY16; 3-4 rigs by FY17, against its 17 operational rigs. Our earnings forecasts had already assumed a 10% lower day rates assumption for its rig division. 

Foreign shareholding is around 24%. This excludes Seadrill’s holding of 8.18%.                                                                                     

The Petrobras pipelay projects are on schedule.  Sapura Diamante  and  Sapura Topazo  had started operations. More hires are needed for the operational staff, which we expect to complement the start-up of operations upon delivery of the new vessels. 

There  was  a  drop  in  OCSS  revenue  QoQ  (-26%).  In  2014,  the  company executed  only  two  works  vs  three  Pan  Malaysia  work  packages  in  2013. However,  margins were higher vs  mobilisation and third-party costs incurred in 2013. 

Capex plans: O&G net capex over the next three years is about MYR100m  per annum  partly for infield drilling, whereas the gas assets will see net capex over the  next  three  years  of  about  MYR400m-500m  per  annum.  B15  will  have development  capex  of  about USD100m,  conditional  upon a  signing of  the  gas sales  agreement.  We  understand  that  capex  guidance  was  unchanged  from early  2014  despite  the  oil  price  slump.  This  forms  part  of  our  own  forecast  of capex (cash flow) of MYR2bn. The majority of its assets has a production breakeven of USD30/barrel (bbl). 

Gross O&G production is about 50,000 barrels of oil equivalent per day (boepd). 4Q  could  see  slight  weakening  in  revenue  as  Brent  was  at   the  ~USD80/bbl region  during  the  lifting  in  November.  The  next  lifting  in  Jan  2015  could  see further weakening in its exploration and production (E&P) division’s revenue.

Source: RHB