SapuraKencana Petroleum Bhd
(Sept 29, RM1.57)
Maintain market perform with an unchanged target price (TP) of RM1.48: In the first half ended July 31, 2016 (1HFY17), SapuraKencana Petroleum Bhd booked a core net profit of RM191.3 million, which is deemed within expectations despite accounting for 98% and 91% of our and consensus full-year estimates as we expect a weaker 2HFY17 on potential drag by weaker engineering and construction (E&C) and drilling segments. Our core net profit excludes the one-off gain of RM37 million arising from the cessation of Berantai risk service contract (RSC). No dividend was declared as expected.

Sequentially, SapuraKencana’s second quarter ended July 31, 2016 (2QFY17) earnings dropped 36% from 1QFY17 in tandem with a 14% drop in overall revenue due to weaker contribution from the drilling segment. However, it was partially offset by better joint venture and associate contributions, led by stronger earnings from pipelay support vessels chartered to Petróleo Brasileiro SA with the commencement of Sapura Esmeralda in April 2016, as well as improvement in the E&C segment. Note that E&C recorded a 53% growth in profit before tax quarter-on-quarter despite a 22% drop in revenue due largely to recognition of higher-margined projects and better asset utilisation post monsoon.

On a year-on-year (y-o-y) basis, earnings fell 79% from RM352.3 million in 2QFY16, in line with a 40% decline in top line, largely marred by weaker contributions across all divisions. The energy segment’s earnings contribution fell significantly to RM6 million from RM63.9 million y-o-y due to lower average lifting oil prices at US$48 (RM197.76) a barrel versus US$65 a barrel in the corresponding period a year ago and exclusion of earnings contribution from the Berantai RSC. Cumulatively, 1HFY17 core net profit fell 68% to RM191.3 million from RM600.8 million in 1HFY16 due to weakening revenue and margins for all three segments.

SapuraKencana’s latest order book weakened to RM17.7 billion from RM19.8 billion in 1QFY17, mainly comprising tenders for its E&C division. The company expects RM4.4 billion and RM3.4 billion to be recognised in 2HFY17 and FY18 respectively. Its tender book was reduced to US$6 billion from US$7 billion in 1QFY17 following several contract wins. We are seeing slower contract replenishment in the next two years in the absence of fabrication and offshore jobs as a result of cautious spending by oil majors.

Despite 1HFY17 earnings accounting for 98% of our full-year forecast, we are maintaining our FY17 and FY18 earnings forecasts in view of weaker prospects in 2HFY17 arising from a weaker drilling segment as well as lower contribution from the E&C segment.

We are maintaining our TP at RM1.48, pegged to 0.7 times FY18 price-to-book value (P/BV), higher than the current sector valuation of 0.6 times P/BV. — Kenanga Research, Sept 29