By AmResearch Sdn Bhd
Fair value: RM4.65
WE maintain our buy recommendation on SapuraKencana Petroleum, with an unchanged fair value of RM4.65 per share – based on a financial year 2015 price earnings (PE) of 22 times, which is the 2007 peak achieved by Kencana Petroleum.
SapuraKencana’s first quarter net profit of RM94mil came in below expectations, accounting for only 9% of our earlier financial year 2014 forecast of RM995mil and consensus estimate of RM1.017bil. Hence, we have cut the group’s 2014 forecast net profit by 5% largely due to a RM45mil non-recurring forex loss, arising largely from timing differences on the completion of Seadrill Ltd’s tender rigs.
But we maintain financial 2015-2016 forecast earnings on anticipation that the completion of the acquisition of Seadrill’s tender rigs will propel SapuraKencana’s earnings momentum further. Hence, we have not changed our fair value.
The group’s first quarter 2014 net profit fell 24% quarter-on-quarter (q-o-q) to RM94mil largely due to the foreign exchange loss, 23% decline in its energy/joint-venture division due to the drydocking of a tender rig, 11-percentage point increase in effective tax rate to 18% and seasonally lower fabrication/hook-up commissioning contributions. Excluding forex losses, the group’s earnings would have instead increased by 15% q-o-q to RM143mil.
On a year-on-year comparison, SapuraKencana’s first quarter earnings surged 2.2 times as the merger of SapuraCrest and Kencana Petroleum was completed in May last year.
But this does not include any contribution from the Seadrill tender rig acquisitions as the deal was only completed on April 30, 2013.
The recent US$2.7bil (RM8.1mil) Petrobras charter for three more flexible pipelay vessels, which will be built outside Brazil, has caused the group’s order book to surge 45% to an estimated RM26bil or 3.5 times financial year 2014 revenues.
The group’s massive order book remains the largest in the oil and gas (O&G) sector and is now double its nearest peer Bumi Armada, which has outstanding charters/contracts valued at RM12bil.
The larger prospective domestic contracts that the group is expecting include the over RM1bil Semarang central processing platform (CPP), which may be awarded soon.
But this is only one of 10 such CPPs that the group is eyeing.
The group is also actively looking at acquiring some of the large production blocks of US-based Newfield Exploration Co, which has indicated its intention to dispose its non-US based assets.
If successful, this will further integrate SapuraKencana’s upstream operations to become a more exciting and formidable player in the sector.
SapuraKencana remains our top pick for the O&G industry.
Valuation remains attractive at the current financial year 2015 PE of 19x, which is at a 13% discount to Kencana Petroleum’s peak in 2007.
By Kenanga Research
FOR the upcoming second-quarter earnings season, we believe the results should be unexciting as crude palm oil (CPO) prices remained low at RM2,320 per tonne (28% down year-on-year and flat quarter-on-quarter) for the quarter.
Looking ahead, we believe the Malaysian palm oil inventory should continue to decline in June 2013 to 1.75 million tonnes and this should be positive to CPO prices.
The Malaysian Palm Oil Board is expected to release its June CPO statistics on July 10. We expect the inventory level to decline by 4% month-on-month to 1.75 million tonnes.
For the month of June, we believe that demand was strong for palm oil due to the stock-up activities ahead of Ramadhan and the warm weather in the Northern Hemisphere.
As palm oil tends to solidify in cold temperature, it is used more during the warm-weather period. We think the sustained decline in inventory should be positive to CPO prices
In the current low CPO price environment, we believe that planters with higher fresh fruit bunch growth should fare better.
According to the latest United States Department of Agriculture (USDA) acreage report, US farmers will plant 77.73 million acres of soybean in 2013, which is within the consensus estimate of 77.81 million acres.
Although USDA also mentioned that the area for harvest would be at a record high of 76.9 million acres, we believe the market should have priced in this estimate judging from the recent falls in both soybean oil and CPO prices last week.
Hence, we believe that the news is neutral to CPO prices.
FELDA GLOBAL VENTURES HOLDINGS
By PublicInvest Research
Target price: RM4.05
WE are surprised that Felda Global Ventures Holdings’ (FGVH) partnership with Bunge Ventures Canada through jointly-owned entity Bunge ETGO (Twin Rivers Technologies Enterprises de Transformation de Graines Oleagineuses du Quebec Inc) will be terminated effective Sept 1, 2013.
Following the termination, FGVH’s downstream business in Canada will revert to recognising revenue from the sale of soybean and canola products and cost of sales from the purchase of soybeans and canola seeds instead of tolling fees.
Nevertheless, we do not see significant impact on our earnings projection as the downstream contribution only accounts for less than 3% of our sales forecasts.
We maintain our underperform call on FGVH with an unchanged target price of RM4.05.
Besides various agreements and arrangements among the parties related to the joint venture, the termination also includes the tolling agreement entered into between Bunge ETGO and FGVH’s Twin Rivers Technologies ETGO, which was established prior to FGV’s initial public offering last year.
Without the risk protection from the upstream segment under the tolling agreement, we believe FGVH’s downstream business in Canada will face difficulties in maintaining the profitability as it had experienced losses several times before establishing the tolling agreement last year.
The low margin in crushing and processing operations is mainly due to heightening cost of buying soybeans and canola seeds, which it needs to acquire from third parties.
We maintain our target price of RM4.05. At this juncture, we are still eagerly waiting for its merger and acquisition plans, which management has guided will be announced in the next three months. Pending re-rating catalysts, we retain our underperform call on FGVH as valuations are relatively expensive amid poor earnings outlook.