AmInvestment Research upgrades SapuraKencana

With a flat bottom, raked stern and bow hull shape, the SKD T-10 is a purpose built barge-type self-erecting tender assisted drilling (TAD) rig

KUALA LUMPUR: AmInvestment Research has upgraded its recommendation on SapuraKencana Petroleum from Hold to Buy with a higher book value-based fair value of RM1.80 a share from an earlier RM1.40 a share.

The research house had on Friday reduced the discount on the group’s intangible assets from 50% to 20%. 

“SapuraKencana’s 9MFY17 net profit of RM381mil came in well above expectations versus our earlier FY17F earnings of RM138mil and street’s RM210mil,” it said. 

AmInvestment Research said even though management reaffirmed its FY17F earnings guidance of RM100mil to RM200mil due to expected losses arising from the group’s seasonally weaker 4QFY17, it expects the full year results to come in towards the higher range of the guidance given that the energy division still broke even despite lower lifting prices and output in 3QFY17. 

“Hence, we have raised FY17F-FY19F earnings by 10%-40% with a RM100mil increase in order book replenishment, together with a 2-3ppts increase in E&C and drilling margin assumptions against the backdrop of a fairly stable order book. 

“With FY17 contract wins of RM4.2bil to date, the group’s order book has only declined slightly by 3% on-quarter to RM17.2bil, of which RM4.9bil will be recognised in FY18F and RM10.3bil in FY19F onwards. The group is hopeful for further wins with tender prospects worth U$7.5bil (RM33bil),” it said.

During 3QFY17, 10 rigs were in operation with T-11, T-19, T-20, Teknik Berkat, Setia and Menang stacked. 

With the semi-tenders Jaya and Alliance being recently stacked and if no charter replenishments were to take place by end-FY17F, half of the group’s fleet of 16 rigs would be unutilised and operating potentially below profit after tax and minority interest (PATAMI) breakeven levels. 

“Nevertheless, the stock currently trades at an unjustified 27% discount to book value given that potential impairments are already being reviewed on a quarterly basis. 

“If crude oil prices remain at the current level, management has indicated that there may not be any need for any further impairments,” it said.