SapuraKencana Petroleum Bhd's Lumut fabrication yard
KUALA LUMPUR: Hong Leong Investment Bank Research (HLIB) has downgraded Sapurakencana Petroleum Bhd (SapKen) to “sell” and believes 2016 would be a challenging year for the group.
“We downgrade the stock to ‘sell’ with unchanged target price of RM1.64 based on lower 12 times 2016 earnings per share (EPS). Risk reward of the stock has worsened recently post its short rally in conjunction with mild recovery of crude oil prices amid speculation of supply cut by major oil producer countries,” HLIB said.
The research house said it was “neutral” on SapKen’s announcement that the latter had been awarded contracts and contract extensions with a combined value of approximately US$382mil (RM1.6biln), based on USD/MYR exchange rate of US$1: RM4.15).
The contract, HLIB said, would not have any financial impact on the company as it deemed the announcement within expectations as it had factored in RM2bil fabrication contract replenishment and continuation of charter on SKD Jaya for both FY16 and FY17.
“It is a neutral announcement to us as majority of the value from the contract awarded are from both of the maintenance contracts spanning 10 years, implying small contribution to the group on per annum basis relative to its revenue base.
“However, margins on maintenance services are usually on the higher end (18-20% normally achieved by group’s engineering and construction (E&C) division) which could reduce lumpiness in earnings for the group’s E&C business,” it said.
HLIB said the charter rate for SKD Jaya extension was estimated to be at US$150,000 per day, similar to levels seen previously. Nonetheless, rates could come under pressure post expiry in April as the asset seeks to secure new contracts due to current weak drilling market.
“Overall, outlook remains uncertain for the group amidst volatile crude oil price environment. We still believe 2016 would be a challenging year for the group given weak contract replenishment outlook and crude prices,” it added.
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