News

• SapuraKencana (SK) announced that it has entered into a non-binding memorandum of understanding (MOU) with Seadrill Limited (“Seadrill”) proposing the integration of both parties tender rig businesses. Upon completion, SK will, 100% own a total of 21 rigs, including Seadrill’s 49% share of 5 rigs, currently held under JV with SK and 3 newbuilds currently owned by Seadrill for an enterprise value of US$2.9bn. In addition, SK will manage 3 rigs, ultimately, owing 51% of the tender rig market. 
• The US$2.9bn enterprise value includes, US$363m remaining capex and US$800m existing debt. US$350m will be financed by the issue of new shares and the remaining US$1.39bn is the wildcard, to be financed by an undecided mixture of debt, equity or cash. The offer is expected to be binding by Jan 13.

Comment

• We view the MOU as positive, consistent with our bullish outlook in both the domestic and international drilling markets. 
• Assuming 100% debt financing for the wildcard US$1.39bn, an average daily charter rate of US$131k, utilisation rates of 80% (currently 86%), and a net profit margin of 20%, our FY14 and FY15 EPS would increase by 38% and 21% to 19.15sen and 19.3sen/share respectively. 
• Assuming maximum dilution from financing the US$1.39bn via new shares at an issue price of RM2.60 as well as the same assumptions as above, our FY14 and FY15 EPS both increase by 5% to 14.6 and 17.1sen/share respectively. 
• Potential TPs, using the above range of potential EPS accretion, based on our unchanged large cap O&G multiple of 20x and FY14 EPS, ranges from RM2.92 to RM3.83.

Risks

• Execution risk, Escalation of vessel and fabrication costs.

Forecasts

• Maintained.

Rating

BUY

• Positives – Strong balance sheet and knowhow,  Global trend towards offshore production.
• Negatives –  Increased competition for growth markets, Complexities of running a larger organization.

Valuation

• TP maintained at RM2.77 for now based on 20x FY01/14 EPS of 13.9 sen/share, pending further clarity. We have not included earnings from the Berantai marginal field. Although potential upside is now less than 10%, we believe news flow, including the digestion of this announcement and positive sentiment towards the sector and this stock in particular will continued to underpin share price performance. Moreover, with potential 7.7-38.3% additional upside based on above assumptions, we maintain our BUY call.

Source: Hong Leong Investment Bank Research - 06 Nov 2012