SapuraKencana Petroleum Bhd
(Dec 17, RM2.20)
Downgrade “neutral” with a target price (TP) of RM1.65: We downgrade SapuraKencana to “neutral” and cut our TP to RM2.20, with 6% upside, 10 times price-earnings (P/E) from RM4.02.
Our TP takes into account weaker exploration and production (E&P) contributions in financial year 2016 (FY16) (at a lower oil price assumption) and risks of order book replenishment for services and rigs internationally.
Our stress test scenario implies that the stock will continue to face weak sentiment and downside risks that could lower our TP to RM1.99.
SapuraKencana provides integrated upstream services and is involved in E&P. It has four main units: fabrication, hook-up and commissioning (HuC) with 125,000 million tonnes per annum capacity; offshore construction and subsea services (OCSS); drilling (17 active tender and semi-tender rigs) and energy/E&P (production sharing blocks, a marginal field and a brownfield development).
The group has a cumulative RM26 billion firm order book (and RM19 billion optional).
Our concerns are the order book replenishment, given its sizeable international exposure (around 70% of the order book is for overseas), and security of cash flow from Petrobras contracts at the V level. Some 40% of its 17 operational rigs are up for renewal and first half of FY16 could see a weaker E&P division if Brent remains at US$65 (RM227.50) to US$70 per barrel (bbl). We lower our FY16 and FY17 core profit forecasts by 7% and 4%, which are now 7% to 11% below consensus.
We expect weaker FY16 E&P earnings due to lower oil prices, and a reduced order book replenishment rate for its services. Our new oil price assumption for 2015 is US$75 to US$85 bbl (maintain US$90 to US$100 bbl for 2016/2017).
We believe this takes into account its execution risks and outlook for contract wins, when the feasibility of many global upstream projects and contracts are at risk as current oil prices of less than US$65 bbl versus breakeven costs becomes a real challenge.
Our sum-of-parts (SOP) comprises: i) E&P: RM0.91 per share discounted cash flow for Malaysia and Vietnam’s producing fields (from RM0.96 per share), ii) enterprise value to earnings before interest, taxes, depreciation and amortisation of 5 times for OCSS (from 10 times, to reflect significant counter-party risks) and tender rig divisions (from 6 times, to reflect risks of contract renewals) and iii) eight times P/E for fabrication and HuC, from 15 times.
In a stress test scenario with Brent crude at US$40 bbl, a 25% cut in rig day rates and cancellation of pipelay contracts from Brazil will derive a RM1.99 TP (implied 9 times P/E).
A scenario of a sustained uptrend of Brent crude to US$90 to US$100 bbl and recovery in order book replenishment activities could boost our TP to RM4.02 (implied 18 times P/E). — RHB Research, Dec 17
This article first appeared in The Edge Financial Daily, on December 18, 2014.