M&A Securities Company Update PP14767/09/2012(030761) SapuraKencana Petroleum Berhad Friday, April 29, 2016 BUY (TP: RM2.34) Fundamentals Remain Solid SapuraKencana Petroleum Berhad (SapuraKencana) outlook is crystal clear, supported by vigorous contract wins which lifted its order book to reach approximately RM21 billion currently. The group is set to carve a new future which is not only exciting but also challenging due the weakness in global crude oil price. We value SapuraKencana at RM2.34 and the stock is a BUY. Current Price (RM) RM1.86 New Target Price (RM) RM2.34 Previous Target Price (RM) RM2.32 Previous Recommend. BUY Upside To Target Price 26% Dividend Yield (FY18) 1% Stock Code Bloomberg SAKP MK Strong visibility on RM21 billion orderbook. We remain positive on the long-term outlook of SapuraKencana despite facing downside risk of challenging oil and gas period. The management guided that the group s current orderbook is still intact at RM21 billion as at January 2016 (2.1x of FY16 revenue) with 30% (RM6.5 billion) would be burned-out in FY17. Geographical wise, the orderbook breakdown is comprise of 55% (RM11.7 billion) from Americas, 30% (RM6.4 billion) from Malaysia, 12% (RM2.6 billion) from Asia Pacific region and the rest are from Australia as well as Africa. Segmental wise, RM21 billion orderbook is consist of 78% (RM16.4 billion) for E&C division, 11% (RM2.3 billion) each for Drilling and Energy division. Latest development. The group has successfully secured new contract awards (February 2016) from Murphy Sarawak and Petronas Floating LNG1 (L) Ltd (PFLNG) for the provision of maintenance services for GE-supplied gas turbines/centrifugal compressors and GE-supplied aeroderivative gas turbines/centrifugal compressors/ electric generators/electric motors with the contract period of 10 years respectively for both contract. In addition, SapuraKencana has also been granted a contract extension by BP Trinidad & Tobago LLC (BP) for its semi-submersible tender assist drilling rig SKD Jaya with additional one well for its drilling campaign at offshore Trinidad & Tobago. These 3 awards carry an impressive combined value of USD382 million (RM1.58 billion). Stock & Market Data Listing MAIN MARKET Sector Oil and Gas Shariah Compliance Yes Issued Shares (mn) 5,992 Market Cap (RM mn) 11,145.4 YTD Chg In Share Price -8% Beta (x) 2.26 52-week Hi/Lo (RM) 2.87 1.36 3M Average Volume (shrs) 9.82mn Estimated Free Float 20% Major Shareholders Sapura Holdings 17% STSB 16% EPF 15% Khasera Baru 10% Note OCSS Offshore Construction & Subsea Services DES Drilling and Energy Services Fab & HUC Fabrication, Hook-up Commissioning & Offshore Vessel Support E&C Enginnering & Construction 1
Newfield update. SapuraKencana has been granted approval from Petronas for the development of SK310 B15 gas field project. The B15 field is expected to produce 100 MMscfd (million standard cubic feet per day) of hydrocarbon gas with first gas delivery expected in 4Q2017. SapuraKencana is one of the operators of the SK310 PSC with a 30% participating interest alongside other partners including Petronas Carigali Sdn. Bhd. (40% stake) and Diamond Energy Sarawak Sdn. Bhd, a subsidiary of Mitsubishi Corporation (30% stake). We were guided that the capex requirement for B15 field is approximately USD300 million with SapuraKencana s portion around USD90 million (based on 30% stake) which will be utilized for the development phase up to 4Q2017. FY16 hit by higher impairment. SapuraKencana reported a net loss of RM792 million in FY16 vs. net profit of RM1.4 billion in FY15 as the group incurred higher provision impairment on its oil and gas asset of RM2.0 billion due to lower crude oil prices. After deducting RM294 million tax impact, the net provision of impairment came down to RM1.7 billion. Therefore, excluding exceptional item, SapuraKencana FY16 core net profit came in at RM715 million (-40% y-o-y), below ours and consensus estimates respectively, accounting 71% and 66% of both divide forecast. Disappointing FY16 earnings was hammered by lower-than-expected core PBT contribution from energy segment (-72% y-o-y) that offset the steady contribution from E&C (+18% y-o-y) and drilling (+9% y-o-y) segment respectively. Earnings outlook. We trim our FY17 earnings projection by 7% as we factor in lower earnings contribution from energy segment in line with lacklustre oil price movement which currently staying around USD40 per barrel and we introduce our FY18 earnings forecast. All in, FY17 and FY18 earnings are projected to increase by 32% y-o-y and 17% y-o-y respectively lifted by i) steady contribution from E&C segment and ii) healthy contribution from PLSV s operation in Brazil. Given the lower oil price environment at the moment, we are cautiously optimistic on the group as its ability to replenish order book may become more challenging in line with the capex cut by oil majors. However, as we expect oil prices to see a mild recovery in 2016, hovering around USD50 per barrel and hence, may provide a slice of opportunity to add new job wins from its sizeable tender bids supported by its strong global presence of over 20 countries. Termination of Vietnam s proposed acquisition. SapuraKencana announced recently that it has terminated the proposed acquisition of 3 PSC blocks in Vietnam consist of; i) Blocks 01/97 and 02/97, ii) Blocks 10 and 11.1 and iii) Block 46-Cai Nuoc. Recall that SapuraKencana have entered into 3 conditional sale and purchase agreements (SPA) in November 2014 to acquire the interest in Petronas Carigali Overseas and PC Vietnam s assets in Vietnam for USD400 million. We are not surprise by the cessation of the deal given the low oil price movement which made the deal no longer attractive. Valuation & recommendation. We re-value our target price on SapuraKencana at RM2.34 as we rollover our valuation into FY18, based on average 3-year low PER of 13x PER pegged to FY18 EPS of 18sen and reiterate our BUY call underpinned by its solid orderbook of approximately RM21 billion, one of the largest in our oil and gas space. Note that the targeted PER will be adjusted gradually once oil price (WTI) surpasses USD50 per barrel. 2
Company FYE Price (RM) Table 1: Peers Comparison (Calenderised) EPS (sen) P/E (X) P/B (X) FY16 FY17 FY16 FY17 FY16 FY17 SapuraKencana Jan 1.86 13 17 10.6 10.9 0.8 0.8 (7) 1 2.34 Buy Wah Seong Dec 0.75 8 9 9.6 8.0 0.5 0.5 1 4 0.80 Hold Bumi Armada Dec 0.79 5 8 14.4 9.3 0.6 0.6 (3) 2 0.95 Buy Dialog Group Jun 1.60 6 7 26.8 24.7 3.7 3.4 14 1 1.60 Hold MMHE Dec 1.05 5 5 20.0 19.3 0.5 0.6 2 NA 0.96 Hold PetDag Dec 24.10 89 94 26.7 25.4 4.4 4.2 16 3 23.58 Hold Dayang Dec 1.26 14 18 8.6 6.9 0.9 0.8 NA 3 1.26 Hold UMW-OG Dec 0.91 (3) (1) NA NA 0.6 0.6 (11) NA 0.90 Hold Perisai Dec 0.25 1 24 20.8 1.0 0.4 0.3 2 NA NR NR Perdana Petroleum Dec NA 6 7 27.5 23.3 NA NA (3) NA NR NR TH Heavy Dec 0.14 NA NA NA NA NA NA (23) NA NR NR Petra Energy Dec 1.26 15 18 8.3 7.0 0.7 0.6 8 2 NR NR Deleum Dec 1.20 13 15 9.2 8.0 1.5 1.4 16 5 NR NR Uzma Dec 1.78 20 23 8.9 7.6 0.9 0.8 2 NA NR NR KNM Dec 0.49 6 6 8.9 7.9 0.4 0.4 2 NA NR NR Average 15.4 12.3 1.2 1.1 1 2 Source: Bloomberg, M&A Securities ROE (%) DY (%) TP (RM) Call Table 2: Financial Forecast YE: Jan (RM million) FY14 FY15 FY16 FY17F FY18F Revenue 8,379 9,943 10,184 8,970 9,059 EBIT 1,846 3,107 3,070 1,435 1,540 Net interest (444) (651) (742) (583) (589) Pre-tax profit 1,208 1,616 (713) 1,166 1,359 Taxation (84) (183) (79) (222) (258) Net Profit 1,087 1,433 (792) 944 1,101 EPS (sen) 19 24 (13) 16 18 EBIT Margin 22% 31% 30% 16% 17% Pre-tax margin 14% 16% -7% 13% 15% PER (x) 22.7 11.2-14.3 12.1 10.3 P/BV (x) 1.4 1.2 1.0 0.9 0.9 DPS (sen) NA 4 1 1 1 Dividend Yield NA 2% 1% 1% 1% Source: Bursa Malaysia, M&A Securities 3
Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 FY14 FY15 FY16 FY17F FY18F RM Points RM million Market Access Geographical Breakdown of RM21 billion Orderbook Segmental Revenue Breakdown (9M15 vs. 9M16) Africa 6,000 5,646 Australia 2% 5,221 1% Asia Pacific 12% Malaysia 30% Americas 55% 5,000 4,000 3,000 2,000 2,956 2,739 2,154 1,600 1,000 0 E&C Drilling Energy FY15 FY16 Source: SapuraKencana, M&A Securities SapuraKencana Share Price vs. KLCI 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 (March 2014 - March 2016) 1,950 1,900 1,850 1,800 1,750 1,700 1,650 1,600 1,550 1,500 1,450 12,000 10,000 8,000 6,000 4,000 2,000 0-2,000 Revenue and Net Profit (FY14 - FY18F) 9,943 10,184 8,379 8,970 9,059 1,087 1,433 944 1,101-792 SapuraKencana (LHS) KLCI (RHS) Revenue Net Profit Source: Bloomberg, M&A Securities 4
M&A Securities STOCK RECOMMENDATIONS BUY Share price is expected to be +10% over the next 12 months. TRADING BUY Share price is expected to be +10% within 3-months due to positive newsflow. HOLD Share price is expected to be between -10% and +10% over the next 12 months. SELL Share price is expected to be -10% over the next 12 months. SECTOR RECOMMENDATIONS OVERWEIGHT The sector is expected to outperform the FBM KLCI over the next 12 months. NEUTRAL The sector is expected to perform in line with the FBM KLCI over the next 12 months. UNDERWEIGHT The sector is expected to underperform the FBM KLCI over the next 12 months. DISCLOSURES AND DISCLAIMER This report has been prepared by M&A SECURITIES SDN BHD. Readers should be fully aware that this report is for informational purposes only and no representation or warranty, expressed or implied is made as to the accuracy, completeness or reliability of the information or opinion contained herein. The recommendation and opinion are based on information obtained or derived from sources believed to be reliable. This report contains financial forecast/projection based on our assumptions which may defer from the actual financial results announced by the companies under coverage. All opinions, estimates and assumptions are subject to change without notice. Analysts will initiate, update and cease coverage solely at the discretion of M&A SECURITIES SDN BHD. Investors are to be cautioned that value of any securities invested may fluctuate from time to time. We advise investors to seek financial, legal and other advice for investing based on the recommendation of our report as we have not taken into account each investors specific investment objectives, risk tolerance and financial position. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. M&A SECURITIES SDN BHD can accept no liability for any consequential loss or damage whether direct or indirect. Investment should be made at investors own risks. M&A SECURITIES SDN BHD and INSAS GROUP of companies, their respective directors, officers, employees and connected parties may have interest in any of the securities mentioned and may benefit from the information herein. M&A SECURITIES SDN BHD and INSAS GROUP of companies and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. This report may not be reproduced, distributed or published in any form or for any purpose. M & A Securities Sdn Bhd (15017-H) (A wholly-owned subsidiary of INSAS BERHAD) A Participating Organisation of Bursa Malaysia Securities Berhad Principal Office: Level 1,2,3 No.45 & 47,43-6 The Boulevard, Mid Valley City, Lingkaran Syed Putra, 59200 Kuala Lumpur Tel: +603 2282 1820 Fax: +603 2283 1893 Website: www.mnaonline.com.my 5