SapuraKencana Petroleum Bhd
(March 3, RM1.97)
Maintain hold call with a target price (TP) of RM1.80: SapuraKencana Petroleum Bhd announced that it has been awarded contracts worth a total value of US$97.4 million (RM433.6 million).

The awards consist of: i) Pan Malaysia Integrated Offshore Transportation and Installation (T&I) work; ii) the engineering, procurement, construction and commissioning (EPCC) job for the Sepat mobile offshore production unit (stabilisation and repair works); iii) Polycold Compact Cooler for the air cooler module; and iv) the petroleum clean-up participation programme for Dana and D30 facilities decommissioning project.

All of the above jobs were awarded by Petronas.

This is still within our order book replenishment assumption for the company. To note, we have imputed RM3 billion replenishment into the group’s order book, of which RM2 billion has been achieved. Overall margins of these contracts are expected at about 8% to 11%, consistent with its recent reported margins.

While relatively small compared with its previous win (RM1.5 billion) announcement in January 2017, it is still positive news to the company and reduces our concern about the company’s order book replenishment risk.

The order book of the company is about RM17.2 billion based on back-of-the-envelope calculations, similar to the level as per announced in the third financial quarter ended Oct 31, 2016 (3QFY17). We expect more contract flows to come in for the group on the expectation of more stable oil prices in 2017.

While T&I have seen higher activities, the EPCC division is still slow with only smallish jobs being dished out. We believe this will persist throughout most of 2017 and bigger EPCC jobs would only be seen towards late 2017.

Risks include execution risk and prolonged low oil prices. We maintain our forecast with a “hold” call, as we are turning more positive on the stock premised on a firmer oil price outlook for 2017. However, the recovery has already been priced in and we believe only the materialisation of a major capital expenditure cycle by oil producers would further catalyse the stock. Our TP is maintained at RM1.80 based on an unchanged FY18 price-to-book value of 0.8 times. — Hong Leong Investment Bank Research, March 3