SapuraKencana Petroleum Bhd ( Valuation: 1.40, Fundamental: 0.65)
(Dec 23, RM1.81)
Upgrade to outperform with a target price (TP) of RM2.38: SapuraKencana Petroleum Bhd’s third quarter ended Oct 31, 2015 (3QFY16) results are deemed within expectations with nine months ended Oct 31, 2015 (9MFY16) core net profit of RM812.9 million accounting for 79.8% and 79.5% of our and consensus forecasts respectively, as we expect weaker 4QFY16 results due to the monsoon season and the lower average Brent crude prices.
The core net profit excludes an RM232.7 million foreign-exchange (forex) gain, impairment of property, plant and equipment, and oil and gas (O&G) properties worth RM857.2 million, and deferred tax liabilities post impairment amounting to RM216.5 million.
Sequentially, core net profit weakened by 20.7% to RM249.6 million from RM314.9 million in the preceding quarter due to both weaker drilling and energy divisions amid the weak crude oil market.
However, this was offset by stronger quarter-on-quarter (q-o-q) profit before tax (PBT) from its engineering and construction (E&C) division due to higher project billings and favourable forex movements.
Its 9MFY16 core net profit declined by 20.6% year-on-year (y-o-y) to RM812.9 million due to weaker energy division performance, driven by the plunge in crude oil prices.
PBT dropped 79.6% y-o-y due to lower oil production and prices. On the other hand, other divisions improved y-o-y in general due to a stronger US dollar and commencement of several new projects.
On E&C, 3QFY16 PBT surged 45.8% y-o-y to RM354 million in line with a 40.7% y-o-y increase in top line for the division. This was mainly due to higher contributions from newly executed international E&C jobs.
As a result, its PBT margin also improved to 19.3% from 18.6% in 3QFY16, also partially attributable to more favourable US dollar/ringgit movement.
Q-o-q, PBT also improved by 7.1% due to higher project billings.
SapuraKencana’s latest order book stands at RM21 billion, mainly comprising tenders for its E&C division.
We maintain our earnings forecasts for now.
We upgrade to “outperform” due to a better risk-to-reward ratio post its recent share-price slide from the RM2.50 level to current levels this month, making its valuation more attractive than before. In addition, the approval of the development plan for its SK301 gas project is also a long-term positive.
We have decided to maintain our TP at RM2.38, pegged to an unchanged price-earnings ratio of 14 times, which is in line with big-cap O&G’s down-cycle valuations. Its earnings are also resilient in the midst of low crude oil prices with its drilling and E&C business relatively intact, compared with other players. — Kenanga Research, Dec 23
SKPETRO (5218) - SapuraKencana posts encouraging 3QFY16 results
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