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More potential earnings from Brazil for SapuraKencana

by Venu Puthankattil, venu@theborneopost.com. Posted on January 22, 2013, Tuesday

KUCHING: Apart from the pending completion of a drilling rig deal with Seadrill, Sapura Kencana Petroleum Bhd (SapuraKencana) can potentially see more positive news in the year ahead in the form of a new contract from Brazilian national oil corporation Petroleo Brasileiro (Petrobras).

Media reports had indicated that the oil and gas (O&G) player had submitted bids for four vessels for eight-year charters in a deal that could be worth in excess of RM8 billion.

Winning a second Petrobras tender would further improve the group’s earnings visibility post financial year 2016 (FY16).

Arhnue Tan of Alliance Research Sdn Bhd cited a report that SapuraKencana (together with joint venture partner Seadrill) were neck and neck with Technip-NorSkan to secure most, if not all, of the Petrobras orders for a fresh batch of seven flexible pipelay support vessels (PLSV) to work in the Brazilian pre-salt play that could be worth more than US$5 billion.

Out of the seven vessels, the Seadrill-SapuraKencana joint venture (Sapura Navegacao), had submitted bids for a 300-tonne Brazilian built PSLV at a US$323,000 day rate, a 550-tonne Brazilian built PSLV at a US$370,000 day rate and two 550-tonne non-Brazilian built PLSVs for USD295,000 per day. All the contracts tendered for were for an eight-year fixed term.

“With SapuraKencana’s previous win of three out of six PLSVs in the previous tender, we view the group to be in a good position to secure more contracts from Petrobras.

“To recap, the previous contract for the three vessels for a fixed term of five years was worth US$1.4 billion (RM4.2 billion) which worked out to be at day rate of roughly US$260,000 per day,” Tan stated.

The analyst opined that the new contract would be worth a lot more than the previous contract, as indicated by the news.

“Assuming the group secures three vessels out of the four that they have tendered for, the contract value for the eight-year charter is estimated at US$2.9 billion or RM8.8 billion.

“That said, with the contract likely to be awarded by mid-year, contributions from the new PLSVs, if the JV (joint venture) wins the contracts, would likely only commence in FY17 or FY18 onwards,” Tan said while estimating construction time for each vessel at 24 to 36 months.

The analyst was positive on SapuraKencana increasing their exposure in Brazil and looked forward to maiden contributions from their first contract starting mid-FY15.

When all three vessels from the first contract would come in full swing by FY17, Tan estimated contributions of an estimated RM150 million or 11 per cent of Alliance Research’s in-house FY17 estimates.

Potential earnings from a second Petrobras tender would bump up net profit contributions from Brazil to RM350 million to RM400 million from FY17 onwards.

Tan revealed, “Inclusive of the new rigs to be purchased from Seadrill, SapuraKencana’s FY14 price earnings ratio (PER) valuation of 14.6 times is extremely attractive for an O&G stock with a four-year earnings compounded annual growth rate close to 50 per cent.

“Large cap peers Bumi Armada Bhd and Malaysia Marine and Heavy Engineering Bhd trade in excess of 20 times and we view that SapuraKencana will catch up once the Seadrill deal is completed.

Maintain Alliance Research’s bullish outlook on SapuraKencana, she valued the stock based on the research house’s pro forma earnings estimates post the Seadrill transaction.

Taking the pro forma earnings per share of 20.3 sen for FY14 (which assumed a 80:20 debt to equity funding ratio on the Seadrill rig purchase) and pegging it to an industry peak cycle PER of 20 times, the research analyst derived the target price on the stock of RM4.07 per share.

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