SapuraCrest: Maintain outperform at RM2.36 with TP of RM2.90

SapuraCrest’s results within expectations

SapuraCrest Petroleum Bhd
(Sept 30, RM2.39)
Maintain outperform at RM2.36 with target price of RM2.90: We reiterate our “outperform” recommendation with SapCrest’s potential earnings catalysts coming from: (i) active order book replenishment; (ii) success in new markets; and (iii) growing fleet of strategic assets. We therefore maintain our target price at RM2.90 with FY2011 EPS of 16.9 times and FY2011 PER of 17.1 times.

SapCrest’s 1HFY2011 net profit came within our and consensus expectations, accounting for 48%. SapCrest declared a single-tier interim dividend of three sen per share during the quarter under review.

For 1HFY2011, despite a decline in revenue, net profit swelled by 33.2% year-on-year (y-o-y), thanks to better margins from the installation of pipelines and facilities (IPF), up four percentage points (ppts) to 9.2% y-o-y, and drilling, up 7.87 ppts to 42.4% y-o-y. The Petronas Carigali Sdn Bhd Umbrella project win and commendable JV contribution bumped up IPF margins, while improved drilling margins were caused by higher drilling charter rates for T9 and Teknik Berkat.

With its order book standing at RM10 billion, SapCrest’s earnings visibility appears to be good, at least for the next two years. However, there are risks should there be a delay in the installation contracts, especially if the direction of crude oil prices remains uncertain. Any review of the safety standards of offshore facilities could potentially also escalate cost estimates and affect the viability of new projects. Nonetheless, by including the full five-year Pan Malaysian pipe-laying contract, its gross order book would be bigger at RM13 billion.

SapCrest has been awarded new drilling contracts for two of its drilling rigs, T-6 and T-10. The T-6 contract from Carigali Hess Operating Company Sdn Bhd and Carigali PTTEPI Operating Company Sdn Bhd is worth US$85 million (RM269.5 million), translating to a daily charter rate of US$101,000 (previously US$99,000). The contract duration is 28 months with an option for two extensions of three months each. Seadrill UK, meanwhile, has chartered T-10 on a bare boat basis for 24 months for US$49 million (RM155.3 million), a lower charter rate of US$68,000 per day (previously US$88,000 per day). We believe the new charter rates are fair and within our earnings forecast for FY2011 to FY2012. — Inter-Pacific Research, Sept 30

This article appeared in The Edge Financial Daily, October 1, 2010.