SapuraKencana Petroleum Bhd (Dec 10, RM2.42)
Maintain ‘buy’ with unchanged target price (TP) of RM3.25. Nine months financial year 2015 (9MFY15) net profit rose >50% year-on-year to RM1.05 billion, and made up 73% of our and consensus full-year estimates. We deem results to be within expectations as we expect the drilling segment to be stronger in the fourth quarter (4Q), offsetting weakness in other segments like offshore construction and energy services with some rigs coming back on charter.

The board announced a tax exempt second interim dividend per share (DPS) of 2 sen, bringing year-to-date (YTD) payout to 4.35 sen (18% payout). This is ahead of our expectation of 15% payout for the year.

Armed with its latest outstanding order book of RM26.5 billion, SapuraKencana’s offshore services like offshore construction, drilling, fabrication and hook-up and commissioning should remain resilient over financial year 2016 (FY16). Most of the group’s assets are tied up for the long term and contributions from Petrobras contracts will pick up in FY16 to make up 7% of group earnings.

However, production segment’s earnings would be affected by the decline in crude oil prices. We have already imputed lower Brent crude oil price of US$75 (RM261) per barrel into our forecast, resulting in earnings contraction of 12% in FY15. We nonetheless expect some recovery in FY16 as additional production comes onstream from Vietnam.

Our TP is sum-of-parts (SOP)-based and implies 16 times FY16 forecast price-earnings ratio (PER).The valuation incorporates PE-based valuations on the group’s offshore services segment and a discounted cash flow value on the exploration and production  business. We have a buy call on SapuraKencana and believe that current valuations have more than priced in the risk factor. The group trades at 12 times FY16 PE, which is below its trough valuation of 16 times. — AllianceDBS Research, Dec 10

This article first appeared in The Edge Financial Daily, on December 11, 2014.