SapuraCrest announced that it has signed an agreement with Realmild Sdn Bhd and Labuan Shipyard & Engineering Sdn Bhd (LSE) to subscribe to a 50% stake in LSE. The yard is sited on 13ha of land within the port of Victoria Harbour in Labuan with deepwater access. Its annual capacity is 36,000 tonnes.Although it is positive, the announcement did not come as a surprise. In an update on Oct 21, 2010, following our US roadshow with management, we wrote that mergers and acqusitions might be on the cards and that a venture into the oil and gas fabrication segment would make the most commercial sense, especially if the company plans to add new drilling rigs and/or pipelay barges to its fleet. All the existing rigs and barges were built by fabricators in Europe and Asia.
We take a favourable view of the acquisition as it could help expand SapuraCrest’s local and regional presence and fast-track its bottom line growth. We are also encouraged that the new business is oil and gas-related and involves a promising segment that SapuraCrest does not have exposure to. The company currently operates in the drilling, installation of pipelines and facilities and marine services segments.
SapuraCrest paid RM25 million for the 50% stake in LSE, which we understand has broken even following a rough patch in recent years. The remaining 50% stake is held by Umno-linked Realmild, which had been leasing the yard from the Ministry of Finance (MoF) for a reported RM7 million per year. We believe SapuraCrest and Realmild will now jointly lease the yard from the MoF. We understand that LSE has a modest order book of around RM250 million, which SapuraCrest hopes to expand over the next 12 months. Already, Petra Energy Bhd has indicated its interest in using the yard’s facility for minor fabrication works. Petra Energy and LSE were to sign the agreement yesterday at the 13th Asian Oil, Gas and Petrochemical Engineering Exhibition at the Kuala Lumpur Convention Centre. Petra Energy executive director and CEO Kamarul Baharin Albakri was quoted as saying that the yard was selected for its strategic location and proximity to oil production facilities in Sabah.
SapuraCrest’s move into fabrication is not a threat to Kencana Petroleum Bhd, which operates a fully-equipped yard in Lumut. Given the low level of activities at the LSE yard in recent years, SapuraCrest’s management expects the yard to be fully developed in three years. With its 13ha yard and RM250 million jobs in hand, LSE is currently not batting in the same league as Kencana, which has a yard sprawling 89ha and an order book of RM1.5 billion.
Pending substantial new orders at the LSE yard, we maintain our forecasts and target price of RM5.12. We continue to value SapuraCrest at a 40% premium over our 14.5 times target market price-earnings ratio given its marginal field venture and superior growth. The stock remains an “outperform” and our top oil and gas pick in view of the potential catalysts of this new venture, more marginal field work and fleet expansion.
On Jan 31, a consortium comprising Petrofac (Malaysia) Sdn Bhd (50%), SapuraCrest (25%) and Kencana (25%) secured the nine-year, US$800 million (RM2.4 billion) Berantai marginal field contract. SapuraCrest’s transport and installation works are being executed as scheduled, helped by its in-house pipelay barges. Results for 1HFY12 should include a maiden contribution from the project.