SapuraCrest Petroleum - Massive orders to grow further from merger BUY

Stock Name: SAPCRES
Company Name: SAPURACREST PETROLEUM BHD

Research House: AMMB

Price Call: BUY

Target Price: 5.94

- We reiterate our BUY call on SapuraCrest Petroleum (SapCrest)with an unchanged fair value of RM5.94/share based on an unchanged  CY12F PE of 22x for SapuraKencana Petroleum 'which arises from the group's merger with Kencana Petroleum (Kencana).

- SapCrest's FY12 net profit of RM310mil was within expectations.Hence, we maintain FY13F-FY14F earnings and introduce FY15F net profit with agrowth of 9%, underpinned by a 5% increase in offshore installation orders. 

- The group's FY12 net profit increase of 34% YoY was drivenlargely by:- (1) higher operational efficiencies, reversal of prior yearprovisions and higher margins towards project completions for installation ofpipelines and facilities (IPF), despite a smaller scope of works in the Pan-Malaysianumbrella contract; (2) reversal of prior-year liability provisions, lowercharter cost and  resolution of disputedbillings for the group's tender rig segment; and (3) turnaround in its marinedivision from higher asset utilisation. This was partly offset by higherinvestment costs due to the A$127mil (RM400mil) acquisition of Australia-listedClough Ltd's marine construction business. 

- The group's 4QFY12 net profit slid 8% QoQ to RM77mil, largelydue to lower activities during the monsoon season, but was largely cushioned bySapCrest's regional IPF activities. 

- Around 41% of SapCrest's gross order book of RM10.5bil stemsfrom the massive US$1.4bil (RM4.2bil) contract to charter and operate threePipe Laying Support Vessels (PLSV) for Petr''leo Brasileiro S.A. (Petrobras).Combined with Kencana, the merged entity's order book of RM13.5bil (2.5x CY12Frevenue) is by far the largest in the oil & gas sector.

- But given that Kencana's yards are only half utilised currently,we expect additional orders to further expand the merged entity's already-hugelocked-in sales. We understand that both SapCrest and Kencana are jointly biddingfor over RM1bil tenders for engineering, procurement, construction, installationand commissioning (EPCIC) projects in Southern China.

- We continue to be positive on Kencana's merger with SapuraCrest,expected to be completed by mid-May this year. Also, we expect the combinedSapuraKencana's net gearing to be manageable at 0.3x-0.5x despite the RM1.8bil capitaldistribution, given that its US$1.5bil capital expenditure programme for bothSapCrest and Kencana will be progressive over the next three years, whileSeadrill will bear half of SapCrest's commitment to build three flexiblepipe-laying support vessels in Brazil.

- The stock currently trades at an attractive CY12F PE of only17x vis-''-vis its 2007 peak of 29x. 

Source: AmeSecurities