PETALING JAYA (Oct 20): Alliance DBS Research is maintaining its “buy” call on Sapura Kenchana Petroleum despite the downgrade of Brent crude oil price assumptions, based on the company’s projected strong earnings.
In a note today, the research house, however, lowered its target price for Sapura Kenchana to RM5.40 from RM5.55 previously due to a slight projected decrease in earnings up to financial year 2016 (FY16).
“Based on our view that weaker crude prices are here to stay, we are lowering our price to earnings (PE) valuation target to 20x from 22x previously,” said Alliance Research analyst Arnhue Tan.
“With the earnings cut and rolling over valuations to FY16F, we derive a slightly lower target price of RM5.40,” she added.
Tan said Sapura Kenchana’s earnings were largely insulated from the recent weakness in crude oil prices, with a slight diminish in earnings due to the fall in crude oil prices.
“Following our downgrade of Brent crude oil price assumption to USD$95 (RM310) per barrel from USD$106 (RM346) per barrel previously, Sapura Kenchana’s financial year 2015 (FY15) earnings are trimmed by only 4% to 5%.
“Other than the production segment, SAKP’s earnings are largely intact as these are backed by its solid orderbook (contracts in the pipeline),” she added.
Tan said Sapura Kenchana’s orderbook largely constitutes long term contracts including the pipe lay support vessel charters from Brazilian oil company Petrobras, comprising 47% of orderbook, and the Pan Malaysian installation contracts (20% of orderbook).
“The drilling business is also stable (19% of orderbook) as are its other segments like sub-sea services and hook-up and commissioning. As such, excluding the production segment, Sapura Kenchana’s earnings for the remainder of FY15 and even at least 60%-70% of FY16F earnings are largely intact,” she added.
Sapura Kenchana’s current market capitalisation is RM20.8 billion.
As of 10.37am today, its shares were trading at RM3.57, up 1 sen or 2.88%.
A total of 5.17 million shares changed hands.