KUCHING: Analysts are generally positive on SapuraKencana Petroleum Bhd’s (SapuraKencana) latest round of awards representing the group’s second largest batch of contracts to date.
SapuraKencana’s board of directors announced in a filing on Bursa Malaysia that its wholly-owned subsidiary companies within the group have been awarded contracts with a combined value of US$215 million or approximately RM889 million.
According to AllianceDBS Research Sdn Bhd (AllianceDBS Research), positive newsflow continued for SapuraKencana, noting that these contracts represented the group’s second largest batch of contracts to date in terms of value.
“Inclusive of these would bring its orderbook to an estimated RM18.6 billion,” the research house said.
The research house further noted it was reported that Swiber was initially shortlisted for the B-157 pipeline engineering, procurement, construction, installation and commissioning (EPCIC) job but the unfortunate recent development with Swiber has led to SapuraKencana clinching second contracts from them.
The research arm of Kenanga Investment Bank Bhd (Kenanga Research) was positive on the news as it showcased the strength of SapuraKencana winning contracts continuously under such challenging environment.
“Brunei Shell Petroleum Sdn Bhd awarded a 2+2 year contract to utilise SKD Pelaut as a bespoke technical solution for its development drilling campaign offshore Brunei,” it said.
SKD Pelaut has been working with Shell Brunei for more than 20 years and the existing contract will expire by the first quarter of current year 2017 (1QCY17).
The research arm believed the new firm contract will commence from then and end by 1QCY19.
Although the respective contracts’ values were not disclosed, Kenanga Research understood that there is no rate adjustment on the daily charter rate (DCR).
Thus, the research arm estimated the DCR is likely to hover around US$120,000 per day valuing the two-year drilling contract at more than US$80 million.
Kenanga Research highlighted that SapuraKencana also secured the EPCIC of 11 pipeline systems and associated topside modifications in relation to the B127 Cluster Pipeline RTR Project from Oil and Natural Gas Corporation Limited (ONGC) for 20 months.
The research arm expected the work to be carried out in Lumut fabrication yard.
Assuming contract value of RM513 million and margin of 15 per cent, Kenanga Reseach estimated that the project could contribute a profit before tax (PBT) of RM76.9 million to financial year 2017-2019 (FY17-19) bottom line.
“Lastly, the third contract award is the provision of underwater maintenance services for Sepat MOPU by Petronas Carigali Sdn Bhd involving inspection, maintenance, repairs, drilling support and other work at the Sepat MOPU field for two months,”
“We anticipate minimal earnings impact to SapuraKencana from the project at RM0.7 million (0.3 per cent of FY17 PBT) assuming eight per cent margin.”
Overall, with the latest win of RM889 million, this brought SapuraKencana’s year to date (YTD) win to RM4.2 billion which surpassed Kenanga Research’s total group order book (including both drilling and engineering and construction (E&C) segments) assumption of RM4 billion in FY17.
However, Kenanga Research still maintained its FY17-18E earnings estimates, as the drilling contract which commences only in FY18 was within the research arm’s order book assumption for drilling segment for FY18.
On the other hand, weaker near term earnings are expected by AllianceDBS Research to negate the upside from recent contracts replenishment.
As such, AllianceDBS Research made no changes to its estimates as these contracts fell under the research house’s orderbook replenishment assumption and it has also assumed an average utilisation of 58 per cent for SapuraKencana’s drilling segment.
AllianceDBS Research maintained its ‘fully valued’ call on SapuraKencana, with its target price unchanged at RM1.16 per share.
“We remain cautious on the stock as its valuation is still lofty, with the results over the next two quarters being crucial in determining the sentiment,” the research house said.
Kenanga Research also maintained its target price at RM1.48 per share.
The research arm believed a higher premium is warranted to encapsulate SapuraKenacana’s long-term positioning as an integrated service player as well as a gas producer with decent gas reserve.
In view of minimal near-term catalysts coupled with order book replenishment risk for drilling and E&C segments, Kenanga Research reiterated ‘market perform’ call on the stock.