AmInvestment retains Hold on SapuraKencana

SapuraKencana's rig making facility

KUALA LUMPUR: AmInvestment Bank is maintaining its Hold call onSapuraKencana Petroleum with an unchanged sum-of-parts derived fair value of RM2.28, which implies a FY17F price-to-earnings (P/E) of 12 times.
 
It said on Monday its forecasts were mostly unchanged as the group’s FY16 normalised results were generally in line with expectations. 

“We introduce FY19F earnings with a slight 6% growth premised on improved vessel utilisation rates,” it said. 

AmInvestment pointed out that excluding RM2.1bil one-off gross provisions for impairments, the group’s normalised net profit of RM1.035bil was 3% below its forecast and 4% below street’s RM1.077bil. 

The RM1.7bil net impairments included RM1.1bil for the group’s acquisition of Newfield oil & gas properties, RM401mil for drilling rigs, RM181mil for two mobile offshore production units and RM22mil for fabrication yards. 

The research house noted that SapuraKencana’s 4QFY16 EBITDA fell 44% on-quarter to RM475mil largely due to the revenue decline of 23% to RM2.2bil, due to the seasonal decline in offshore construction work during the monsoon season and US$10/barrel decline in average crude oil price to US$37/barrel. 

“This caused core net profit to decline from RM272mil in 3QFY16 to a loss of RM58mil in 4QFY16. 

“Management indicated that the lifting cost for the energy division’s crude oil production was US$30 to US$35 a barrel with its cash costs below US$30 a barrel. With Tapis oil prices currently above US$40/barrel, we expect some slight improvement in this segment,” it said. 

For the drilling division, five of the group’s 16 rigs are currently stacked, with five rigs expected to drop out of charter this year. Management expects some of these rigs to renew charter but we expect the charter rates to be lower given the low global utilisation rates. 

AmInvestment said currently, four of the group’s 50%-owned flexible pipelay support vessels for Petrobras are being paid on time. With Sapura Emerald expected to be delivered in 2QFY16 and Sapura Rubi in 3QFY16, we expect stronger associate earnings to partly offset the lower drilling segment contributions. 

“The group’s current order book of RM21.3bil accounts for 2.3 times FY17F revenue. For FY17F, management expects RM6.5bil of the order book to be realised – 70% of our assumption. 

“While management indicated that there will be new contracts to be secured in the near term, there could be further downside risks to our earning forecasts over the next few quarters.,” it said.

The stock currently trades at a fair FY17F PE of 12 times as it expects potential earnings declines in the drilling segment together with weak contributions from the energy division.