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PublicInvest Research

Author: PublicInvest   |   Latest post: Fri, 19 Apr 2019, 10:04 AM

 

Sapura Energy - Improving Outlook But Slower-Than Expected Recovery

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Stripping-off some exceptional items including i) impairment on goodwill and PPE of RM1.5bn, ii) gain on disposal of its 50% stake in upstream business of RM2.7bn, and iii) RM281m from other provision and forex, Sapura Energy (SapE) reported a relatively bigger core net loss of RM286.1m in 4QFY19. Cumulatively, the Group’s core net loss of RM654.8m for full-year FY19 was larger than our and consensus’ projection of a loss of RM498.5m and RM364.7m respectively. The weak performance was mainly attributed to lower recognition from the E&C and drilling segments as a result of higher cost incurred as most of the E&C projects are still in the initial procurement phase as well as low utilization of assets. Operational numbers remained positive nonetheless, with EBITDA of RM877m and margins at 15.9% for FY19. While trusting that the Group is currently in positive transition toward improving its numbers, we reckon the recovery process is likely to be slower-than-expected and hence, we cut our earnings forecasts by an average of 67% for FY20/21. Our TP is subsequently lowered to RM0.43 but our Outperform rating on SapE is retained on the back of its improving outlook.

  • Engineering & Construction (E&C) reported sales of RM3.7bn (-7.4% YTD) in FY19 on the back of lower activities during the period. Despite of its quite acceptable revenue, the Group reported a pre-tax loss of RM568.9m from a profit of RM194.5m in FY18, resulting from the provisions of its assets and a non-core project. Excluding all the provisions amounting to c. RM564m, we reckon the segment will be on the breakeven level instead. Moving forward, we are positive on the earnings outlook for this segment, as progress should ramp up in the 2H on the back of strong orderbook in hand.
  • Revenue for drilling segment fell 18.5% YTD to RM933.5m, with a pre-tax loss of RM1.2bn. Stripping-off the impairment on drilling rig amounting to RM1bn, the segment reported a slightly higher core loss of about RM3.6m to RM213.2m in FY19, compared to RM209.7m in FY18. This was mainly due to underutilization of its rigs. Sapura’s rig utilization has fallen back to 6 in 4QFY19 as compared to 7 in the previous quarter due to the expiration of Sapura T-17’s charter to Chevron in Thailand. We foresee the improvement for the rigs utilization as well as on the earnings could only be seen in 2HFY18 as Sapura Jaya rigs will only commence in 2QFY20 in Angola. The management targeted to achieve 8 rigs by end the FY20, 11 and 13 in FY21/22. While the recovery path is slower-than-expected, we are hopeful on the Group’s potential strategic partnership for this segment will bear fruits in the near future.
  • Exploration and Production (E&P) segment reported revenue of RM936m (+10.9% YTD) on higher liftings and average realised oil and gas prices. In line with higher revenue, pre-tax profit surged 37.6% YTD to RM88.6m. Total production lifted has been consistent since 4QFY18 at 1.1 mmboe, making up total lifted to 4.4 mmboe in FY19, compared to 3.5 mmboe in FY18. Average crude lifting price was higher at USD72/bbl versus USD58/bbl in FY18. We foresee contribution from this segment to further improve in FY21 onwards as the SK408 Phase 1 development for Gorek, Larak and Bakong fields are on track for first gas in late 2020.
  • Earnings forecast. While trusting that the Group is currently in positive transition toward improving its numbers, we reckon the recovery process is likely to be slower-than-expected, hence we cut our earnings forecasts by an average of 67% for FY20/21. We also expect FY22 to be much stronger with net earnings of close RM200m backed by its solid orderbook in hand of RM17.2bn (including RM9.3bn secured in FY19) and potential new jobs win from its active tenderbook of c. RM45.1bn as well as improved contribution from E&P segment.
  • Better balance sheet. As of 4QFY19, SapE net gearing has improved to 0.6x from 1.7x in 3QFY19 thanks to the fund-raising exercises via rights issue and warrants as well as disposal of its 50% stake in Sapura Upstream. The Group has raised approx. RM7.6bn from these exercises and proceeds were mostly used for debt repayment while some for working capital. This also helps the Group to improve its bottom line numbers as it will save the Group’s interest cost of around RM314m annually. On a separate note, the Group has declared a single tier special dividend of 0.5sen per share to be paid on 24th June 2019.

Source: PublicInvest Research - 26 Mar 2019

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