News     SKPETRO announced that it had entered into a placement agreement with CIMB, Maybank and CIMB Securities (Singapore) for the proposed placement of 587m new SKPETRO shares at an issue price of RM2.80/share.

These new shares will replace the 'base placement shares' (286.3m shares) and 'redeemable exchangeable preferences shares (REPS)' to Seadrill (272.5m shares) that the company was initially looking to place out.

Comments     Pursuant to this proposal, the new share base is estimated to be higher by 5.3% to 5,992.2m shares (versus the previous 5,691.4m shares) and raise gross proceeds of RM1.6b.

Given that there are now no more REPS for the near-term, this will dilute our previous estimated CY13 EPS of 19sen by 5%. However, we believe that overall investors will be neutral on this dilution as they will now be looking beyond to CY14 earnings for the full impact of the Seadrill acquisition to SKPETRO. As such, we have rolled forward our target price earnings base to CY14.

Outlook     We are positive on the merged entity for its existing scale and existing global track record.

Management hopes to conclude the Seadrill acquisition by end-Apr CY13.

Forecast     We have included the Seadrill estimates into our projections given that the acquisition is nearing completion.

We have fine-tuned our FY14 earnings and reduced it to RM1.04b (from RM1.14b) mainly due to a lower contribution of the Seadrill tender-rig earnings as the acquisition will not have a full-year contribution as yet (9 months for FY14).

We are introducing our FY15 earnings forecast at RM1.3b, where we are assuming around RM3.0b in new contract wins for the OCSS division and RM3.0b as well for the Fab & HUC division in 2013. For the other divisions, we expect a run-down of their current order books.

Rating     Maintain OUTPERFORM

Valuation      We have currently assumed a share base of 5.99b based on the new information above.

Given that we have rolled forward our call basis to CY14, our revised target price is now at RM4.15 (from RM3.82 previously) based on an unchanged 20.0x PER.

Previously, we had tactically increased our PER to 26.5x factor in the potential earnings from the Seadrill acquisition. However, given that we have now imputed it into our earnings, we have reverted back to our earlier 20x targeted PER.

Premium valuations are accorded to the stock (versus 15.0x for the sector average and 18.0x for MMHE) due to its significant domestic market dominance and service scale range.

Risks    1) High capex plans of the company could strain growth prospects and 2) Delay in contract executions could result in lower-than-expected earnings; and 3) high competition could impact margins as there are a number of global players.

Source: Kenanga