SKPETRO (5218) SAPURAKENCANA PETROLEUM BHD
Target RM6.84 (Stock Rating: ADD)
In response to a media report on Petrobras’s failure to obtain auditor approval for its 3Q earnings, SapuraKencana’s management stated that its operations in Brazil are going smoothly and payments have been received on time. Sapura Diamante and Sapura Topazio have been deployed in Brazilian waters to work for Petrobras. We expect their early contributions to be reflected in SapuraKencana's 2HFY1/15 results. We continue to value the stock at 21.2x CY16 P/E, still at a 30% premium over our target market P/E of 16.3x. We maintain our Add rating, with strong order book momentum and a successful E&P venture as potential re-rating catalysts. SapuraKencana remains our top pick among the oil & gas big caps.
What Happened
Reuters quoted a Brazilian newspaper report that stated Brazil’s state-run Petrobras had failed to get its 3Q earnings approved by its auditor that demanded wider investigation into a corruption scandal. SapuraKencana's management assured us that the company's operations in Brazil have made steady progress and that Petrobras’s payments for the charter services (denominated in US dollar) have been on time. The payments are received within 30 days from the invoice dates. Brazil accounted for 47% of SapuraKencana's RM26.8bn order book as at Aug 2014. Sapura Navegacao, a 50:50 JV between SapuraKencana and Seadrill, has two contracts with Petrobras. In Nov 2011, the JV secured a 5+5 US$1.4bn contract to charter and operate three pipelay support vessels (PLSVs). The second contract, which was awarded in Jun 2013, was worth US$2.7bn. The 8+8 contract calls for the services of three additional PLSVs.
What We Think
We are comforted by management's assurance that it is business as usual in Brazil. Sapura Diamante, which started work three months ahead of schedule in Jun 2014, has been enjoying a high utilisation rate of 98-100%. The utilisation rate for Sapura Topazio, which commenced operations in Sep 2014, has not been disclosed yet but we understand that it is a favourable figure. The two assets will start contributing to SapuraKencana's net profit in 2HFY1/15.
What You Should Do
We advise investors to accumulate the stock following the share price correction, as SapuraKencana offers solid order book and earnings visibility, supported by its exploration and production (E&P) venture, the two long-term contracts in Brazil, as well as various multiple-year offshore construction and drilling contracts.
Source: CIMB Daybreak - 04 November 2014,
