SapuraCrest Petroleum- 2QFY10 results shine

Price: RM1.70
Target Price: RM1.80
Recommendation: HOLD

· 1HFY10 results in line. 1H10 net profits surged to RM78m, meeting 54% of our expectations (RM144.5m) and 53% of consensus (RM147.7m). In line with historical trend, sequential improvement in 3QFY10 is expected. First interim DPS of 3.0sen declared in the current quarter.

· QoQ, net profit (RM52.4m) up 104.1%, driven by increase in operating margins of the drilling division and revenue from IPF division. Drilling division margins up 10.7ppts to 40.2% (from 29.5%) due to rate revisions for 2 rigs, T9 (USD135k per/day) and Teknik Berkat (USD121k per/day), whilst improvement in IPF division (107.8% up) was no surprise, as historically 1Q and 4Q are seasonally softer. Gearing levels improved to net cash (net debt of 0.3x previously).

· YoY, net profit up a significant 63.1%, again due to margin accretion of the drilling division. Associate earnings of RM1.7m (Q2FY09: loss of RM10.3m) also lent support to bottom-line, illustrating the JV (SapuraAcergy) earnings turnaround that management has guided.

· Large order book anchor earnings. Order book stands at a hefty RM5.3b (Sapuracrest: RM3.7b (ex Q2FY10 revenue); SapuraAcergy: RM1.6b (50% of awarded contracts) with contract expirations stretching up till FY12 thus providing earnings visibility. Tender book remains unchanged at c.RM4b-RM5b (guided since April 09).

· Petronas RM3b umbrella contract. There is much excitement on the 5-package umbrella contract that Petronas is dishing out on behalf of 11 production-sharing (PSC) operators. Besides Sapuracrest, there are 5 contenders and latest news (Upstream online), are for awards in October. Group’s strike rate should be high as they meet the ‘Malaysian’ requirement and have the necessary capacity to execute the contract. We have not factored any earnings into our forecasts as yet.

· Revise net earnings up 9% to RM157.3m for FY10 and up 8% to RM196.4m for FY11, with upward bias pending meet with management. For now, we revise our JV earnings to RM5m for FY10 (from RM10m loss expectations) as it is evident the turnaround is feasible. We also incorporate RM4.8m of Iwaki decommissioning project earnings to our FY11 JV contribution (now RM26.8m) and raise our FY11 operating margins’ assumptions of IPF to 5% (previously 4.5%) and drilling to 29% (previously 27%) to reflect the current margin appreciation.

· Upgrade to HOLD with target price of RM1.80 based on calendarised CY10 EPS of 15 sen on PER of 12x (previously 11x). We accord it a premium of 2x to the peer average, as it has finally shed off its ‘spotty execution’ reputation, whilst it key assets, ala the Sapura3000, and strategic ramp ups for other divisions (eg. GE Oil and Gas alliance; acquisition of 60% stake from Scomi Oilserve) will definitely pave the way should any new opportunities arise