TASecurities · exploration and production (E&P) activities. In addition, the national oil company will implement 19 large projects and commence drilling in more than 1,000 offshore

TA SecuritiesA Member of the TA Group

INITIATE COVERAGE

Friday, June 22, 2012

FBM KLCI: 1,601.43

Sector: Oil & Gas

MENARA TA ONE, 22 JALAN P. RAMLEE, 50250 KUALA LUMPUR, MALAYSIA TEL: +603-20721277 / FAX: +603-20325048

Page 1 of 12

SapuraKencana Petroleum Bhd

TP: RM2.85 (+27%) Emerging Global O&G Juggernaut Last Traded: RM2.25

THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* Buy

TA Research Coverage

+603-2072-1277 ext: 1265

[email protected]

www.taonline.com.my

We initiate coverage on SapuraKencana Petroleum Bhd (SAKP) with a

Buy recommendation and target price of RM2.85, which is based on

target CY13 PER multiple of 20x. We are optimistic of SAKP’s prospects

due to:- (1) a strong contender for global contracts due to its extensive

and expanding asset base, solid track record, and integrated service

solutions; (2) ability to capitalize on the capex upcycle in Malaysia and

Brazil; (3) high earnings visibility from RM14.4bn outstanding

orderbook and RM12.5bn tenderbook; (4) potential for earnings upside

arising from better than expected margin derived from merger

synergies; and (5) healthy balance sheet that enables it to further expand

asset base.

One-stop service provider. SAKP is the result of a merger between leading

Malaysian offshore service providers, SapuraCrest Petroleum (SCRES) and

Kencana Petroleum (KEPB). The combined asset base and expertise of both

entities enables SAKP to be an integrated service provider covering 90% of the

O&G value chain with full-fledged Engineering, Procurement, Construction,

Installation and Commissioning (EPCIC) capabilities. Hence, SAKP is able to

undertake larger and more complex projects. In addition, the group’s enlarged

balance sheet will enables it to acquire more assets to service its contracts.

SAKP’s Installation of Pipelines & Facilities (IPF) fleet of 4 Derrick Lay Vessels

(DLV) and 1 Pipe Laying Service Vessel (PLSV) will double in size by 2014

upon delivery of 5 newbuilds comprising 2 units of DLVs and 3 units of PLSVs.

Capex upcycle in key operating markets. Under Malaysia’s Economic

Transformation Program (ETP), Petronas has committed to a 5-year

USD100bn capex program to boost domestic O&G production with emphasis

on greenfield deepwater developments and brownfield shallow water life-

extension projects. Currently, there are 10 shallow-water marginal fields ready

for development whereas 6 deepwater fields have been identified for future

development. We expect SAKP to be a major beneficiary of Petronas’ capex

initiatives given its track record in executing ETP projects awarded earlier. In

total, SAKP has secured ETP contracts totaling RM3.36bn including the

Berantai marginal field and projects in Gumusut-Kakap and Kikeh deepwater

fields.

In Brazil, Petrobras’ 2011-15 Business Plan highlighted initiatives to invest

USD225bn in the O&G industry whereby 57% (USD128mn) will be allocated to

exploration and production (E&P) activities. In addition, the national oil

company will implement 19 large projects and commence drilling in more than

1,000 offshore wells. SAKP is a strong contender for Brazillian contracts given

its formidable partnership with Seadrill that successfully clinched a USD1.4bn

5-year contract from Petrobras to charter 3 PLSVs back in November 2011.

Bloomberg Code SAKP MK

Stock Code 5218

Listing Main Board

Share Cap (mn) 5,004

Market Cap (RMmn) 11,110

Par Value (RM) 1.00

52-wk Hi/Lo (RM) 2.31/1.91

12-mth Avg Daily Vol ('000 shrs) n.a.

Estimated Free Float (%) 45%

Beta n.a.

Major Shareholders (%) STSB - 19%

Khasera - 15.9%

EPF - 12.5%

Seadrill - 6.4%

Forecast

FY12 FY13

Core Net Profit (RM mn) 651.9 718.5

Consensus 622.75 755.083

TA/Consensus (%) 105% 95%

Previous Rating

Financial Indicators

FY13 FY14

Net Debt/Equity (%) 45.3 46.4

ROA (%) 5.0 5.1

ROE (%) 10.4 10.1

NTA/Share (RM) 0.27 0.44

P/NTA (x) 8.4 5.1

Share Performance

Price Change (%) SAKP FBMKLCI

1 mth 13.3 3.9

3 mth n.a 1.1

6 mth n.a 7.7

12 mth n.a 1.8

Share Information

Buy (New)

(12-Mth) Share Price relative to the FBM KLCI

Source: Bloomberg

TA SecuritiesA Member of the TA Group 22-Jun-12

Page 2 of 12

Massive RM14.4bn orderbook and RM12.5bn tenderbook. SAKP’s current

order backlog is equivalent to more than 3 years of FY12 revenue. SAKP has a

growing international presence whereby markets such as Brazil and Australia

comprise 33% and 19% of its current order backlog. SAKP’s tenderbook is

divided equally between domestic and foreign projects with a 30-45% bid

success rate. Year-to-date, the group has managed to secure RM1.1bn worth of

contracts. SAKP’s existing partnerships with world-class oilfield service

providers (Seadrill, Subsea 7, Petrofac, Saipem, Larsen & Toubro, Bechtel, and

Leighton) enables SAKP to bid for international contracts.

Merger synergies translate into higher margin. Post-merger, SAKP is able

to bid for full-service turnkey contracts that command higher margin. There is

potential upside to streets’ earnings estimates for the group due to the effect of

enhanced margin compounded with significant cost savings from merger

synergies. SAKP is able to consolidate its purchases of materials within the

group and thus optimize procurement costs. In addition, SAKP is able to

minimize earnings leakages to subcontractors and internalise profit margin.

Healthy balance sheet. SAKP has current cash balance of RM2.1bn and 0.4x

net gearing. SAKP has additional debt headroom of RM2.0bn assuming the

group leverages up to a comfortable net gearing level of 0.8x to fast track its

asset expansion to fuel growth.

Risks. (1) Fluctuating crude oil prices will limit or delay capex spending by

oilfield operators; (2) Execution risk due to unfamiliar new business ventures

in foreign markets; (3) Impairment of RM4.91bn of goodwill (equivalent to

96% of current shareholders’ funds) will negatively impact SAKP’s bottomline;

(4) Slower than expected orderbook replenishment due to lumpy award of

contracts will result in downwards revision of earnings forecasts.; and (5) Late

delivery of vessels will impact cashflows and delay the execution of contracts.

Valuation

Our target price of RM2.85 is based on 20x blended CY13 EPS, which is

marginally above the average 18.3x CY13 valuation of SAKP’s local peers and

implies potential upside of 27%.

Background

SAKP is an integrated upstream Oil & Gas service provider with operations in

Malaysia and regionally. The Group’s business is segmented into 5 core areas

as per Figure 1:-

Figure 1: Core Business

Source: Company


Page 3 of 12

SAKP offers integrated solutions covering 90% of an oilfield’s development

stage. Hence, being a one-stop service provider, SAKP has competitive

advantage in securing larger and more complex turnkey EPCIC projects. SAKP

has a workforce of 9,000 employees servicing projects in more than 22

countries, with its core markets being Malaysia, Brazil and Australia. SAKP

operates within the league of Top 30 global offshore oil field service providers

by revenue which includes industry heavyweights such as Schlumberger,

Halliburton and Saipem.

Figure 2: Typical Lifecycle of O&G Fields and SAKP’s Services

Source: Company

Merger Rationale

SAKP was formed in May 2012 after the merger between two leading Malaysian

offshore service providers, SapuraCrest Petroleum (SCRES) and Kencana

Petroleum (KEPB). The existing businesses of the separate entities were

complementary to each other, except for some overlap in Drilling and Hook-up

and Commissioning (HUC) services. SCRES’ core strength was in Offshore

Installation whilst KEPB in Fabrication and EPCC (Engineering, Procurement,

Construction and Commissioning). Hence, the combined expertise and asset

base of both entities enables SAKP to execute full-fledged Engineering,

Procurement, Construction, Installation and Commissioning (EPCIC) services

which include detailed engineering, procurement of materials, construction of

structures, transportation to site, installation, and commissioning (preparatory

activities to commence operations) services for clients. Post-merger, SAKP will

be able to bid for full-service turnkey contracts for field development with

higher margins, whereas in the past, SCRES and KEPB both operated as sub-

contractors in smaller turnkey supply contracts. The combined asset base and

expertise of both entities enables SAKP to offer integrated services and the

ability to undertake larger projects. In addition, the group’s enlarged balance

sheet enables SAKP to acquire more assets to service its contracts.

Furthermore, SAKP is able to consolidate its purchases of materials within the

group and thus optimise procurement costs. On top of that, SAKP is able to

minimize earnings leakages to subcontractors and internalise profit margins.


Page 4 of 12

Management Team & Shareholding

SAKP has an ensemble management team led by Dato’ Seri Shahril Shmasuddin

as President & Group CEO and Dato’ Mokhzani Mahathir as Executive Vice-

Chairman. Dato’ Seri Shahril was Executive Vice-Chairman at SCRES whilst

Dato’ Mokhzani had previously headed KEPB as CEO. Private investment

vehicles of Dato’ Seri Shahril and Dato’ Mokhzani are the biggest shareholders

at SAKP with a 19% and 16% stake respectively. Norwegian offshore drilling

company, Seadrill, which is also SAKP’s JV partner in Drilling services and

Brazillian IPF projects, is a major shareholder in SAKP with a 6% stake.

Figure 3: Organization Chart

Source: Company

Asset Base

SAKP has a large existing asset base to service its various business divisions

comprising four Derrick Lay Vessels (DLV), one Pipe Laying Service Vessel

(PSLV), one Floating Production Storage & Offloading (FPSO) vessel, six Self

Erecting Tender Assisted (SETR) rigs, two fabrication yards, and 47 units of

various marine offshore support vessels (OSV).


Page 5 of 12

Figure 4: Asset Base (excluding Rigs) by Segment

Segment Asset Type

Built/

Upgraded Stake Partner

IPF Sapura 3000 PLSV 2008 50% Subsea 7

LTS 3000 DLV 2010 40% Larsen & Toubro

QP 2000 DLV 2009 26% Quippo & MDL

Java Constructor DLV 2009 100%

Clough Challenge DLV 1996 100%

Newbuild DLV Expected: 4Q13

Newbuild DLV Expected: 1Q14

Newbuild PLSV Expected: 2014 50% Seadrill



No. of Units

Development 1 FPSO Berantai Delivery: 2Q12 49% Petrofac

& Production

Marine 6 Diving/Support Vessels

Services 4 Anchor Handling Tugs (AHT)

4 Geotechnical/ Geophysical Vessels

6 Accomodation Workboats/ Barges

1 Semi-submersible Barge

24 Remote Operating Vehicles (ROV)

2 Mobile Offshore Production Unit (MOPU)

Capacity Location

EPC 64k MT p.a / 240 ac Fabrication Yard Lumut 100%

36k MT p.a / 74 ac Shipyard Labuan 50% Realmild

Source: Company, TA Research

Figure 5: Drilling Rig Assets & Contract Details

Rig

Built/

Upgraded

Water

Depth Client

Contract

Tenure

Contract

Extn

Option Stake Partner

T-3 2001 122 m Seadrill/PTT Feb 05-Jun 12 51% Seadrill

T-6 2000 122m

Carigali Hess &

Carigali- PTTEPI Dec 10 - Apr 13 2 x 3 mths 51% Seadrill

T-9 2003 2000m Petronas Carigali Apr 12 - Mar 13 12 mths 51% Seadrill

T-10 2007 2000m

Seadrill/Chevron

Thailand Jan 11 -Jan 13 - 51% Seadrill

Teknik Berkat 2005 152m - 51% Seadrill

KM-1 2010 245m Petronas Carigali Sept 10 - Aug 15 5 yrs 100% -

Newbuild SETR Expected Delivery: 2014

Newbuild SETR Expected Delivery: 2014 Source: Company, TA Research

SAKP’s Installation of Pipelines & Facilities (IPF) fleet of 4 DLVs and 1 PLSV will

double in size by 2014 upon delivery of 5 newbuilds comprising 2 units of DLVs

and 3 units of PLSVs. In anticipation of strong demand for specialized vessels

used for installation of pipelines & faciilities, SAKP placed orders for 2

newbuild DLVs from Cosco Nantong’s shipyard in China back in September

2011. The two DLVs will be built at a total cost of USD227mn for delivery in

4Q13 and 1Q14 respectively. In addition, SAKP is currently constructing two

newbuild SETR rigs at its fabrication yard in Lumut at a cost of US$145mn each

for delivery in 2014.

Orderbook

SAKP has current outstanding orderbook of RM14.3bn whereby a significant

portion (83%) comprises EPCIC contracts. A majority of SAKP’s contracts are

Malaysian-based (42%) but SAKP is growing its presence in international

markets such as Brazil and Australia which comprise 33% and 19% of its

current order backlog. SAKP has a RM12.5bn tenderbook divided equally

between domestic and foreign projects with a 30-45% bid success rate. Year-to-

date, the Group has managed to secure RM1.1bn worth of contracts and is

targeting a RM3bn HUC project on the domestic front.


Page 6 of 12

Figure 6: Current Outstanding Orderbook by Segment

9.1

2.8

1.30.9 0.1

14.35

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

IPF / HUC EPC Drilling Marine Svc O&M Total

RM

'bn

Source: Company, TA Research

Key contracts in SAKP’s current outstanding orderbook include:- (1) USD1.4bn

(RM4.34bn) 5-year contract from Petrobras to charter and operate 3 PLSVs

commencing in 2014; (2) Pan Malaysia T&I project with remaining unbilled

contract value of RM1.5bn; (3) Domestic Gas (Domgas) contract awarded by

Chevron Australia for Transportation & Installation (T&I) works on the Gorgon

Project with remaining value of RM736mn; (4) EPCC for Wheatstone LNG

project awarded in December 2011 from Bechtel with contract value of RM1bn;

and (5) RM460mn EPCC contract for SPSA Development Project awarded by

Murphy Sarawak Oil to commence in 1Q13.

Figure 7: Geographical Breakdown of Orderbook

Source: Company

SAKP’s partnerships and strategic alliances with world-class O&G service

providers enable SAKP to participate in the international bidding circuit for

contracts. SAKP has existing JVs with Seadrill, Subsea 7, Petrofac, Saipem,

Larsen & Toubro (India), Bechtel, and Leighton (Australia).


Page 7 of 12

In November 2011, a 50:50 joint venture (JV) between Seadrill and SAKP

successfully secured a 5-year contract to operate and charter-out three PLSVs

to Brazil’s state-owned oil company, Petrobras, commencing from 4Q15. This

project, valued at US$1.4bn, is SAKP’s single largest contract to-date. One of the

newbuild 300-tonne PLSVs for the project will be built in Brazil at a cost of

US$260mn (delivery: Dec 2014) whilst the remaining two units of 550 tonnes

each will be built by Dutch shipbuilder IHC Offshore for US$600mn per unit

(delivery: May-Aug 2014). Ownership of the newbuild PLSVs will be split

equally between SKSP and Seadrill. Currently, the SAKP-Seadrill JV is also

bidding for Petrobras’ second round of tenders for the charter and operations

of six units of 600-tonne PSLVs and is hopeful of clinching at least 3 units of

PSLVs.

In January 2011, SAKP’s 50:50 JV with Petrofac (listed in London Stock

Exchange) secured a Risk Sharing Contract (RSC) from Petronas to develop and

produce petroleum resources at Berantai field, located 150km offshore

Terengganu for a period of 8 years. Under the RSC, SAKP-Seadrill is also

responsible to provide total project funding of circa USD1.0bn including the

provision of a Floating, Production, Storage and Offloading (FPSO) vessel

estimated to cost USD200mn. The JV will construct a well-head platform of 18

wells and a pipeline linking it to an existing platform. A second well-head

platform will be installed in the second phase. The Berantai field is on-track for

production of first-gas in Aug 2012. The Group will also participate for the

upcoming marginal field projects alongside its existing partner, Petrofac.

Outlook

Due to a maturing offshore industry, there has been marked decline of large

shallow water discoveries in recent years. Hence, Exploration and Production

activities are increasingly taking place in deeper waters, more remote locations

and harsh climates. Therefore, higher levels of capex are being invested by oil

companies worldwide to fund highly technical and complex deepwater

projects. Infield forecasts total offshore capex to increase to nearly USD500bn

between 2011 and 2015 (2006-10: USD336bn). SAKP has promising prospects

in its core target markets comprising Malaysia, Brazil and Australia:-

Malaysia

Under Malaysia’s Economic Transformation Program, Petronas has committed

to a 5-year USD100bn capex program to boost domestic O&G production and

reserves. The national oil company targets to extract 1.7bn barrels of oil mainly

via greenfield deepwater developments and brownfield shallow water life-

extension projects. In addition, Petronas has also lined up initiatives on shallow

water fields whereby 22 new blocks have been identified. On top of that, there

is also allocation of RM3bn for Maintenance and HUC contracts.

There are currently 25 shallow-water marginal fields lined up whereby 10 are

ready for development. To-date, only two RSCs have been awarded whereby

the second RSC after Berantai was awarded to a JV between Dialog Group and

Australia’s ROC Oil in Aug 2011 for the development of Sarawak’s Balai

Clusters.

Whereas for deepwater development, 6 fields have been identified for future

development, with the Jangas and Ubah Crest fields targeted for first oil

production by 2013-14. SAKP is a major beneficiary of deepwater projects

whereby it was involved in the installation of offshore facilities at the Gumusut-

Kakap and Kikeh fields. Currently, SAKP is executing a US$69mn contract to

fabricate offshore structures at the Kebabangan deepwater cluster.


Page 8 of 12

Figure 8: Deepwater Projects in Malaysia

Source: Company

SAKP is also a key beneficiary of ETP programs whereby it has secured

contracts totaling USD1.08bn (RM3.36bn) including USD215mn (RM667mn)

from oil majors besides Petronas such as Petrofac, Shell and Murphy.

Brazil

According to Infield, Brazil’s offshore market has entered a prolonged growth

phase driven by prolific deepwater and pre-salt frontiers. The Brazillian

deepwater market with significantly high capex requirements is expected to

account for nearly 90% of national offshore capex. Key highlights from

Petrobras’ 2011-15 Business Plan includes the following initiatives:- (i)

USD225bn O&G investments whereby 57% (USD128mn) will be allocated to

Production; (ii) implementation of 19 large projects to add capacity of 2.3mn

barrels of oil per day; (iii) drilling of more than 1,000 offshore wells; and (iv)

pre-salt production to correspond to 40.5% of national oil production by 2020.

Australia

There is significant long-term deepwater potential in Australia, with activity

expected to peak in 2015 to almost USD2.1bn. Gas demand continues to

support LNG projects, beyond those already under construction. Sanctioned

LNG projects will elevate Australia to the world’s largest LNG exporter shortly

after 2015.

The group has secured substantial contracts in Australia including:-

USD170mn (RM527mn) Transportation and Installation (T&I) contract from

Apache Energy for offshore facilities for the Devil Creek Development Project

awarded in Oct 2009; and (ii) USD160mn (RM496mn) T&I contract from


Page 9 of 12

PTTEP Australasia at the Montara Development Project awarded in November

2010. SAKP’s current active projects in Australia include Domgas at Gorgon and

the Wheatstone LNG project. SAKP has further strengthened its presence in

Australia via the purchase of Clough’s (listed on Australian Stock Exchange)

marine construction business in August 2011.

Figure 9: SWOT Analysis

Strengths Weaknesses

- One of few licensees eligible to bid

for contracts by Petronas and its PSCs.

- Partnerships with world class O&G

operators.

- Integrated service provider with full

range of assets.

- Substantial orderbook attributed to a

single client (Petronas).

- RM4.9bn of Goodwill subject to

impairment test every year.

- Capital intensive

Opportunities Threats

- Increased E&P capex spend by

Petrobras’ in Brazil.

- ETP projects in Malaysia and

marginal field RSCs.

- Fluctuations in crude oil prices.

- Fluctuation in steel (key raw

material) prices.

- Late delivery of vessels.

- Execution risk from new ventures

in foreign markets.

Dividend Policy

Currently, the Group does not have a fixed dividend policy although we note

that both SapuraCrest and Kencana had paid dividends before the merger

exercise. Hence, we do not impute dividend payments from SAKP in our

forecasts pending guidance from management on its targeted dividend payout.

Peers Comparison

SAKP’s comparable international peers which offer full in-house EPCIC services

are as per Figure 10. However, we note that the following offshore construction

contractors have more established track records in delivering deepwater

projects.

Figure 10: International Peers

P/B (x) Divd Yield

CY12 CY13 CY12 CY13 CY12 CY12 (%)

Saipem SPA SPM IM 32.32 17,986.98 13.8 11.8 20.3 20.4 2.9 2.4

Technip SA TEC FP 78.64 11,004.36 16.9 12.7 14.6 17.9 2.4 2.1

Subsea 7 SA SUBC NO 120.40 7,086.15 14.7 10.1 9.0 10.9 1.2 1.9

Sapura Kencana SAKP MK 2.22 3,520.66 16.7 15.5 10.6 10.1 2.0 -

Aker Solutions AKSO NO 76.30 3,497.61 9.8 7.6 18.8 20.5 1.8 4.3

McDermott Inc MDR US 10.53 2,480.61 10.9 8.8 13.1 14.5 1.4 0.0

C&J Energy Inc CJES US 18.99 986.58 4.7 4.5 42.7 31.4 2.2 0.0

Ezra Hldgs Ltd EZRA SP 1.02 786.59 11.3 8.3 7.5 9.0 0.8 0.4

Average 12.3 9.9 17.1 16.8 1.8 1.6

Bloomberg

Ticker

Price (Local

Curr)

Market Cap

(US$ mn)

Core P/E (x) ROE (%)

SAKP’s comparable local peers in the O&G space are as per Figure 11. Currently,

no other Malaysian O&G company offers the full suite of oilfield services except

for SAKP. However, individual segments of SAKP’s operations competes with

the businesses of its peers such as Marine Services (Bumi Armada),

EPCC/Fabrication (MMHE), Drilling (Perisai’s new venture) and Development

& Production of Marginal Fields (Dialog). With the exception of Bumi Armada,

none of SAKP’s local peers have an international clientele base.


Page 10 of 12

Figure 11: Malaysian Peers

P/B (x) Divd Yield

CY12 CY13 CY12 CY13 CY12 CY12 (%)

Bumi Armada BAB MK 4.06 11,889.6 21.7 17.1 14.9 17.2 3.4 0.9

Sapura Kencana SAKPMK 2.22 11,109.7 16.7 15.5 10.6 10.1 2.0 -

MMHE MMHE MK 5.50 8,800.0 24.0 24.3 14.5 13.2 3.4 1.8

Dialog Group DLG MK 2.41 5,798.8 31.3 25.9 22.8 22.7 4.9 1.4

Perisai PPT MK 0.90 762.3 8.5 8.5 22.7 17.4 1.4 -

Average 20.5 18.3 17.1 16.1 3.0 1.4

Bloomberg

Ticker

Price

(RM)

Market Cap

(RM mn)

Core P/E (x) ROE (%)

Financial Highlights

Earnings Drivers

We project SAKP’s core FY13 EPS to grow 28% backed by its sizeable

RM14.35bn orderbook and improved margin derived from merger synergies. In

addition, FY13 earnings are further boosted by 6-months contribution from

SAKP’s FPSO Berantai and Berantai RSC. Thereafter, we include full-year

earnings totaling RM165mn p.a. from both projects to our forecasts. We expect

full-year contribution from one of SAKP’s newbuild drilling rigs in FY15. Our

estimates are based on orderbook replenishment of RM3bn in FY13 and RM4bn

in FY14-15 which we believe is achievable due to the delivery of new vessels

and assets in FY14-15 (FY14: two rigs + one DLV, FY15: Three PSLVs + one

DLV) that will increase the capacity of SAKP’s IPF and drilling fleet. There is

upside to our estimates as we did not factor in potential marginal field project

wins.

Liquid Balance Sheet

SAKP has a healthy balance sheet with current cash balance of RM2.1bn and

0.4x net gearing. SAKP has additional debt headroom of approximately

RM2.0bn assuming the group leverages up to a comfortable net gearing level of

0.8x. By gearing up, SAKP is able to fast track its asset expansion to fuel growth.

Nevertheless, we expect SAKP to have moderate net gearing of 0.45x in FY13-

14 assuming no additional asset purchases.

Potential Impairment of Goodwill

As a result of SAKP’s merger exercise, the Group has RM4.91bn of

goodwill/intangible assets sitting on its balance sheet which is equivalent to

96% of its current shareholders’ funds of RM5.12bn. This non-cash item is

subject to impairment test on annual basis and hence may negatively impact

SAKP’s bottomline if the Group is forced to write-down this item if business

condition deteriorates.

Valuation

Our target price of RM2.85 is based on CY13 PER of 20x, which is marginally

above the average 18.3x valuation of SAKP’s local peers. We believe our target

valuation is fair given SAKP’s superiority above its peers in terms of integrated

business model, orderbook, liquidity, and market cap. SAKP is currently trading

at 15.5x 1-year forward PE which is at a significant 10%-67% discount

compared to its large-cap peers Bumi Armada (17.1x), Malaysia Marine Heavy

Engineering (24.3x) and Dialog Group (25.9x).


Page 11 of 12

We note that SAKP is trading a higher forward earnings multiple in comparison

to its international peers. However, we believe the premium is warranted due

to the fact that the bulk of SAKP’s earnings in the near-to-medium term are

derived from Malaysia whereby local companies take precedence in Petronas

tenders. Hence, SAKP’s earnings risk profile would be significantly lower than

its global peers.

Earnings Summary

FYE Jan (RM mn) 2012 2013F 2014F 2015F

Revenue 4,672.6 5,125.2 5,195.8 5,692.6

EBITDA 646.6 1,343.9 1,401.4 1,581.1

EBITDA margin (%) 13.8 26.2 27.0 27.8

Pretax Profit 688.1 924.1 1,013.7 1,115.5

Net Profit 454.5 651.9 718.5 805.0

Core Net Profit 508.2 651.9 718.5 805.0

Core EPS (sen) 10.2 13.0 14.4 16.1

EPS growth (%) 18.0 28.3 10.2 12.0

PER (x) 21.9 17.0 15.5 13.8

Gross Divd/Share (sen) 0 0 0 0

[THE REMAINING OF THIS PAGE IS INTENTIONALLY LEFT BLANK]


Page 12 of 12

Financial Summary P&L BALANCE SHEET

FYE 31 Jan (RMmn) 2012 2013f 2014f 2015f FYE 31 Jan (RMmn) 2012 2013f 2014f 2015f

Revenue 4,672.6 5,125.2 5,195.8 5,692.6 Fixed assets 2,797.1 4,042.8 5,208.8 6,504.1

EBITDA 646.6 1343.9 1401.4 1581.1 Intangibles 4,911.8 4,911.8 4,911.8 4,911.8

Depreciation (170.7) (246.7) (317.9) (397.0) Invt in Associates 8.2 8.2 8.2 8.2

Net finance cost (61.3) (236.6) (233.7) (233.7) Invt in JCEs 217.3 280.8 444.7 609.8

Associates + JV (0.3) 0.0 0.0 0.0 Other receivables 41.1 41.1 41.1 41.1

Jointly Controlled Ent 103.1 63.5 163.9 165.1 Deferred Tax 11.2 11.2 11.2 11.2

Pretax profit 688.1 924.1 1013.7 1115.5 Non-Current Assets 7,986.6 9,295.9 10,625.8 12,086.2

Taxation (90.4) (129.1) (152.1) (167.3)

MI (143.1) (143.1) (143.1) (143.1) Inventories 88.3 112.3 113.9 124.8

Core Net Profit 508.2 651.9 718.5 805.0 Trade and other rcvb 1,927.1 1,656.9 1,679.8 1,840.4

Derivatives 1.0 1.0 1.0 1.0

Per Share Data Tax Recoverable 33.5 33.5 33.5 33.5

Basic EPS (sen) 9.1 13.0 14.4 16.1 Cash and Deposits 2,111.0 1,878.2 1,680.4 1,672.1

Core EPS (sen) 10.2 13.0 14.4 16.1 Assets held for sale 13.5 13.5 13.5 13.5

Net DPS (sen) 0.0 0.0 0.0 0.0 Current Assets 4,174.3 3,695.4 3,522.0 3,685.2

Book Value (RM) 1.09 1.25 1.42 1.61

Net Tang Asset (RM) 0.11 0.27 0.44 0.63 Borrowings 3,433.0 3,642.7 3,910.5 4,395.3

Derivatives 2.3 2.3 2.3 2.3

RATIOS Deferred Tax 51.7 51.7 51.7 51.7

Non-current liabilities 3,487.1 3,696.7 3,964.5 4,449.3

Valuations

Basic PER (x) 24.8 17.3 15.7 14.0 Borrowings 1,065.9 1,065.9 1,065.9 1,065.9

Core PER (x) 22.2 17.3 15.7 14.0 Trade & other Payables 2,140.2 1,965.8 1,992.9 2,183.5

Gross yield (%) - - - - Derivatives 1.2 1.2 1.2 1.2

EV/EBITDA (x) 21.6 10.8 10.8 10.0 Income Tax Payable 12.9 12.9 12.9 12.9

P/BV (x) 2.1 1.8 1.6 1.4 Liabilities held for sale 4.3 4.3 4.3 4.3

P/NTA (x) 20.94 8.45 5.13 3.58 Current Liabilities 3,224.6 3,050.2 3,077.3 3,267.8

Profitability ratios Share capital 5,004.4 5,004.4 5,004.4 5,004.4

EBITDA margin (%) 13.8 26.2 27.0 27.8 Reserves 116.8 768.7 1,487.2 2,292.2

EBIT margin (%) 16.0 21.4 20.9 20.8 Minority interests 328.2 471.4 614.5 757.7

PBT margin (%) 0.1 (7.9) 3.4 4.2 Equity 5,449.4 6,244.4 7,106.1 8,054.2

Net margin (%) 9.7 12.7 13.8 14.1

ROE (%) 9.3 10.4 10.1 10.0 CASH FLOW STATEMENT

ROA (%) 4.2 5.0 5.1 5.1 PBT 924.1 1,013.7 1,115.5

Depreciation & Amortisation 246.7 317.9 397.0

Liquidity ratios Net Interest (236.6) (233.7) (233.7)

Current ratio (x) 1.3 1.2 1.1 1.1 Working Capital Changes 71.8 2.7 19.1

Quick ratio (x) 1.3 1.2 1.1 1.1 Income Taxes Paid (129.1) (152.1) (167.3)

Share of results of JCEs (63.5) (163.9) (165.1)

Leverage ratios CF from Operations 628.0 813.4 784.7 965.4

Total Debt/ Assets (x) 0.4 0.4 0.4 0.3

Total Debt/Equity (x) 0.8 0.8 0.7 0.7 Capex (999.0) (848.1) (898.3)

Net debt/ Equity (x) 0.44 0.45 0.46 0.47 CF from Investing (999.0) (848.1) (898.3)

Interest coverage ratio (x) 12.2 3.8 3.9 4.3

LT Debt Additions 799.2 678.5 718.6

Growth ratios LT Debt Repayment (846.4) (812.9) (794.0)

Revenue (%) 7.5 9.7 1.4 9.6 CF from Financing 491.9 (47.2) (134.3) (75.4)

EBITDA (%) 18.3 107.8 4.3 12.8

PBT (%) 28.4 34.3 9.7 10.0 Net Cash Flow 429.6 (232.8) (197.8) (8.3)

Core net profit (%) (3.6) 43.4 10.2 12.0 Beginning Cash 2,111.0 1,878.2 1,680.4

Core EPS (%) 18.0 28.3 10.2 12.0 Effect of exchg rates - - -

Ending Cash 2,111.0 1,878.2 1,680.4 1,672.1

Disclaimer

The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein.

for TA SECURITIES HOLDINGS BERHAD (14948-M)

MENARA TA ONE, 22 JALAN P. RAMLEE, 50250 KUALA LUMPUR, MALAYSIA TEL: +603-20721277 / FAX: +603-20325048

(A Participating Organisation of Bursa Malaysia Securities Berhad)

Kaladher Govindan – Head of Research

Documents

TASecurities · exploration and production (E&P) activities. In addition, the national oil company will implement 19 large projects and commence drilling in more than 1,000 offshore