SapuraKencana Petroleum Bhd
(June 16, RM2.40)
Maintain hold with unchanged target price of RM2.55: Sapura-Kencana Petroleum (SKP) reported first quarter financial year 2016 (1QFY16) net profit that is 24% of our and consensus estimates. The company declared a 1.35 sen dividend per share for the quarter, on par with last year’s distribution.

The key driver of 1QFY16 earnings was the drilling division, which accounted for 45% of group profit before tax and registered a 26% margin versus 24% in 1QFY15. The improved margin was a result of the cost-cutting exercise as the number of rigs working was flat year-on-year. The energy services division and marine business were weak, as expected. Energy services reported weaker earnings due to lower crude oil prices but remained profitable with active cost-cutting initiatives. 

We expect FY16 earnings to meet our expectations, with RM6.4 billion of the group’s RM24.5 billion order book to be recognised this year. In FY17, another RM5.1 billion will be recognised. Nevertheless, the group needs to secure new contracts this year and we expect another RM4 billion worth of new jobs for the rest of FY16.

The energy services division will continue to drag down earnings this year given weak crude oil prices. But, with active cost-cutting efforts, the segment will remain profitable. And the longer-term outlook for the segment is positive. SKP is still in the process of acquiring new assets in Sabah and Vietnam, and also working on developing over three trillion cu ft of gas reserves. This could materialise soon with an initial gas sales agreement on the cards.

SKP has been hot on the acquisition trail in recent years, which has stretched its balance sheet, although financing arrangements are typically ring-fenced against the business. The latest gearing is 1.2 times. Our analysis suggests a 10% earnings impact for every US$5 (RM18.75) change in crude oil prices. This will have an impact on SKP’s future Malaysian contract wins and potentially slow the roll-out of work orders for the group’s Malaysian contracts for installation and hook-up and commissioning. — AllianceDBS Research, June 16

This article first appeared in The Edge Financial Daily, on June 17, 2015.