SAPCRES ... July10

- 1QFY11 net profit of RM50.7m achieved 23% of our expectations (RM219.4m) and that of consensus (RM216.8m) underpinned by robust IPF and JV returns. Expected pick up in momentum going into 2QFY11 given seasonality with Q1 and Q4 typically impacted by the monsoon season.

- QoQ, net profit rose 30.8% due to the increase in IPF division earnings
(+99%) with the start-up of the PCSB Umbrella contract and reduction in Marine Services division losses (-81.4%). JV earnings (RM11.3m) were sequentially down (Q4FY10: RM27.5m) due to skewed 4QFY10 on write back of over-provisions for some previously completed projects and a slight delay in the start up of the SapuraAcergy for the year.

- YoY, net profit gained a whopping 97.5% again mainly on better margins
from the IPF (+8.8ppts) and drilling (+9.7 ppts) divisions. The PCSB Ubrella project win and commendable JV contributions bumped up IPF argins , while improved drilling margins were caused by higher drilling
charter rates garnered in FY10 for T9 and Teknik Berkat. Overall, net margins expanded 4.0ppts (1QFY11: 7.6%; 1QFY10: 3.6%).

- Prospects intact for FY11. Management is positive as contracts are lockedin for their main earnings drivers (IPF, drilling divisions and their JVSapuraAcergy); whilst optimisation of their fleet will continue as they mobilise their new assets (the L&T and Quippo-Prakash pipe-lay barges) which they have already received . Guided for profitable marine services division, within the year, will lend strength to bottom -line numbers, while to date RM8.1b order book (TLO: RM4.7b/ JV: RM1.9b (50% of RM3.7b)/ Drilling: RM0.7b/Marine Services RM0.8b) will last them at least 2 years based on their burn rate of RM3.5b per annum. Tender book is RM3b and increasing.

- Maintain BUY at RM3.09 TP on 18x FY11F. Our positive view on the stock remains gi ven their locked-in prospects. Earnings catalyst will come from the Group’s push for an expanded regional base (India/Australia/Japan) and
sustained charter rates for their drilling contracts.