SapuraKencana Petroleum Bhd
(March 18, RM2.31)
Downgrade to hold from buy with lower target price (TP) of RM2.55 from RM3.25: We view that SapuraKencana may make impairments of up to RM700 million in the upcoming fourth quarter ended January of financial year 2015 (4QFY15) results as Newfield’s assets were purchased in FY14 when crude oil was above US$90 per barrel. 

That said, the impairment is a non-cash item and impact may be muted as it could be offset by the inclusion of new gas reserves discovered in 2014.

A greater concern in the upcoming results would be if SapuraKencana has to make allowances for trade receivables in the marine or drilling segments, and in the worst-case scenario for the Petroleo Brasileiro SA (Petrobras) contract.

We see this as unlikely for now as the bulk of SapuraKencana’s customers are established production sharing contracts (PSCs), but if it were to happen, the impact may not be fully reflected in its current share price and valuation.

The recent departure of Tan Sri Mokhzani Mahathir and Yeow Kheng Chew will have no impact on group operations, in our view. 

Mokhzani has not taken an active role in SapuraKencana’s management since the merger and Tan Sri Shahril Shamsuddin continues to take the helm in the management and developing growth strategies of the company. 

That said, investors may be concerned about share overhang from the potential disposal of Mohkzani’s 9.1% stake in SapuraKencana.

We downgrade our call on the stock to “hold” with a lower TP of RM2.55, derived by sum-of-parts (SoP) based, 13 times implied price-earnings ratio (PER) after adjusting down PER multiples in our SoP and cutting our crude oil average selling price (ASP) assumption to US$60 (RM221.40) per barrel for FY16 and and FY17. 

We also trim FY15 ASP to US$95 per barrel from US$97 per barrel previously, thus adjusting our FY15 earnings downwards by 3%. — AllianceDBS Research, March 18

This article first appeared in The Edge Financial Daily, on March 19, 2015.