Target RM6.84 (Stock Rating: ADD)
Newfield has proven to be a good acquisition as it gives SapuraKencana expertise in the E&P segment, leading to yesterday’s announcements of the company adding six blocks in Malaysia and Vietnam to its E&P portfolio. The new blocks underscore Petronas’s endorsement of SapuraKencana’s E&P capabilities. We maintain our forecasts for now, but we understand that the Vietnam blocks could add US$40m p.a. to SapuraKencana’s bottomline. 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 an Add call with a successful E&P venture and strong order book momentum as potential re-rating catalysts. SapuraKencana remains our top pick among the oil & gas big caps.
What Happened
SapuraKencana cements its exploration and production (E&P) presence by scooping up six blocks: 1) Four blocks in Vietnam which will be purchased from Petronas for US$400m. 2) Two blocks in Sabah which are awarded by Petronas to a consortium that consists of SapuraKencana, Petronas Carigali and M3nergy after a competitive bidding exercise (Figure 1).
What We Think
Building a portfolio of upstream assets that will provide sustainable growth is a natural progression for SapuraKencana following the US$896m acquisition of Newfield's Malaysian assets in Feb 2014. Unlike Newfield's eight oil fields and three (out of four) Vietnam blocks that are already producing, the two Sabah blocks are new ones, underlining Petronas's stamp of approval on SapuraKencana's E&P capabilities. The Vietnam acquisitions are slated for completion by mid-FY16 and will be funded by the multi-currency financing facility that forms part of the RM16.5bn debt that was restructured earlier this year. The three producing blocks could contribute US$40m in net profit annually, potentially boosting our EPS forecasts by 3% in FY15 and 6% in FY16. Meanwhile, the Sabah blocks will first undergo exploration works before producing first oil or gas.
What You Should Do
We advise investors to accumulate the stock as SapuraKencana offers a solid order book of RM26.8bn (as at Aug 2014) and earnings visibility, supported by its E&P ventures, two long-term contracts in Brazil, as well as various multiple-year offshore construction and drilling contracts.
Source: CIMB Daybreak - 21 November 2014
