This article first appeared in The Edge Financial Daily, on December 18, 2015.

SapuraKencana Petroleum Bhd
(Dec 17, RM1.84)
Maintain buy with an unchanged fair value (FV) of RM2.45: We maintain our “buy” call for now on SapuraKencana Petroleum (SapuraKencana) with an unchanged FV of RM2.45 per share, pegged to financial year ending Jan 31, 2016 (FY16F) forecast price-earnings ratio (PER) of 14 times.

The group has signed a Murabahah Term financing facility of up to US$2.1 billion (RM9.09 billion) with a consortium of Malaysian, regional and international banks this year.

This six-year multi-currency Islamic facility will be used to refinance SapuraKencana’s existing short-term Islamic facility. But the more important reason is to ensure the retention of its syariah-compliant listing status. 

The package is similar to the earlier RM7 billion multi-currency Islamic medium term notes launched in June this year. The proceeds from that facility were to refinance the group’s earlier RM16.5 billion multi-currency financing facility in 2014.

Earnings prospects for SapuraKencana are weighed down by the current low oil price environment, which has depressed charter rates and asset values for upstream oil and gas players.

The group’s 17 rigs currently have a utilisation rate of 70% and this could drop to 50% next year. There is a strong likelihood that there could be impairments for these assets by the end of the financial year, albeit partly offset by possible revaluations of the group’s oil producing assets in Malaysia. 

However, this may be partly offset by the group’s offshore construction division, as three more flexible pipe-laying support vessels will begin operations in Brazil — Sapura Jade in February 2016, Sapura Esmeralda in April 2016 and Sapura Ruby in August 2016.

The stock currently trades at 0.9 times price-to-book value and an attractive FY16F PER of 11 times, below its two-year average of 17 times. The group’s RM21 billion current order book, which accounts for 2.2 times FY17F revenues, provides some earnings support over the next two to three years despite the current weak sector outlook. — AmResearch, Dec 17