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SapuraKencana Petroleum Bhd
(Nov 21, RM3.11)
Maintain “buy” with lower target price (TP) of RM5.13:
SapuraKencana has expanded its drilling division after acquiring three production sharing contract (PSC) blocks (46-CN, 10-11.1 and 01/97 & 02/97) in Vietnam from Petroliam Nasional Bhd (Petronas) for US$400 million (RM1.34 billion). Of the three blocks, 46-CN and 01/97 & 02/97 are already producing oil and gas and will contribute to earnings and cash flow.

The company was also awarded a 27-year PSC by Petronas for two blocks (SB331 and SB332) onshore Sabah, covering 31,000 sq km or 42% of Sabah’s land area. This  comes after the acquisition of Newfield Malaysia early last year, which kick-started its drilling business. The Vietnam blocks will lift SapuraKencana’s production to almost 35,000 barrels of oil equivalent per day (kboepd) from 23kbpoed from Newfield Malaysia’s assets.

We are keeping our earnings per share (EPS) forecast for financial year 2015 ending this January (FY15) and FY16 at the moment as the Vietnam transaction is expected to be completed next year with earnings pouring in after that. Despite the slump in share price recently, SapuraKencana’s fundamentals remain strong and are backed by a huge order book of RM26.1 billion with extension options worth RM19.1 billion.

We reiterate our “buy” call at a TP of RM5.13 (previously RM6.03) as we remove the valuation premium over the industry price-earnings ratio (PER) following the lower oil price. Our target price is based on FY16 EPS forecast of 25.7 sen and lower industry PER of 20 times. We continue to favour the stock. — JF Apex Research, Nov 21

SapuraKencana_24Nov2014_theedgemarkets

This article first appeared in The Edge Financial Daily, on November 24, 2014.

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