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SapuraKencana Petroleum Bhd
(Dec 8, RM2.52)
Maintain “buy” with lower target price of RM3.70 from RM4.86
. The drop in the company’s share price broadly coincided with the decline in global crude oil prices since the June-July period, but the momentum accelerated when global crude oil prices staged larger intraday drops in September. For the most part of this calendar year, SapuraKencana has been trading sideways within the range of RM4-RM4.80. Apart from the decline in global crude oil prices, we believe that the decline in SapuraKencana’s share price was also attributable to its relegation from the Securities Commission’s list of syariah-compliant stocks.

SapuraKencana’s order book of approximately RM28 billion remains intact on top of RM19 billion more in extension options. In addition, the company’s order book is robust enough to withstand short term shocks as around 70% of the orders are from national oil companies and 18% are from international oil companies.

Since its listing, SapuraKencana has been trading at a rolling four-quarter average price earnings ratio (PER) of 25 times. However, weak global crude oil price coupled with Petronas’ capex cut have resulted in a widespread valuation de-rating among local oil and gas companies. Hence, we are de-valuing SapuraKencana with a revised PER16 of 16 times. Our revised target PER16 is one standard deviation lower than its rolling four-quarter average PER of 25 times. We are still advocating a buy recommendation on this stock.

Meanwhile, the company has just announced a series of new contract wins totalling RM1.58 billion. These new contracts were secured by all of its three core business segments, namely OCSS, DES and Fab & HUC divisions. — MIDF Research, Dec 8

SapuraKencana-09Dec2014_theedgemarkets

 

This article first appeared in The Edge Financial Daily, on December 9, 2014.

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