Sapura Energy Berhad- Hopeful Start But Uncertainty Ahead

Date: 30/06/2020

Source  :  PUBLIC BANK
Stock  :  SAPNRG       Price Target  :  0.09      |      Price Call  :  HOLD
        Last Price  :  0.115      |      Upside/Downside  :  -0.025 (21.74%)

Sapura Energy (SapE) reported a 1QFY21 net profit of RM14.2m, though core earnings was still in a net loss position at RM19.7m. This is significantly narrower than the core losses of RM124.5m and RM508.6m recorded in 1QFY20 and 4QFY20 respectively however. The performance was attributed to lower operating costs by 24.9% YoY as well as improved Engineering and Construction (E&C) recognition with pre-tax profit and margin surging by 157.9% YoY and 7.7ppt. We deem the results as above our and consensus expectations, beating projections of RM612.4m and RM560.5m core losses respectively. Despite the encouraging 1QFY21 earnings coupled with the ongoing cost rationalization efforts, SapE’s outlook remains uncertain in view of the challenging operating climate which has led the oil majors to cut spending, raising the risk of project deferment, cancellation and execution. SapE’s earnings are unlikely to turn around in the near term, in our view. We are narrowing our FY21/22 loss projections by 26.8% and 1.7% to RM448.5m and RM401.2m, factoring the impact of the cost rationalization and the higher 1QFY21 E&C margins. Our FY23 earnings are relatively unchanged. We upgrade our rating to Neutral with higher TP of RM0.09 (from RM0.06 previously) following the earnings adjustment, as well as rollover of valuations to FY22.

  • A hopeful start. The Group reported headline profit of RM14.2m from a loss RM109.1m. Stripping-off some exceptional items, it reported a slight core loss of RM19.7m, as compared to a loss of RM124.5m in the previous corresponding period. The performance is attributed to lower operating costs by 24.9% YoY as some of the cost rationalization initiatives like salary cuts, rightsizing exercise, vessel, yard, rig and overhead cost rationalization as well as procurement savings came into effect. For the full year, the Group is expected to reduce a total of RM650m in operating costs, a reduction of 12.6% from FY20 operating cost of RM5.17bn.
  • Performance supported by E&C. Operationally, the encouraging start was also supported by its E&C segment with pre-tax profit and margin surging by 157.9% YoY and 7.7ppt despite lower work volumes achieved. This is attributed to a sudden increase in spot orders, leading to higher utilization of assets. We see this as temporary nonetheless, as it doesn’t reflect the activity levels from its orderbook. Meanwhile, the drilling segment reported a small pre-tax loss of RM14.9m (+70.7% YoY) in line with higher revenue by 4.5% YoY. The improvement was mainly due to higher rig utilization of 7 units versus 5 units in 1QFY20. The rigs will reduce by 1 unit in 2QFY21 however. SapE’s exploration and production division reported a pre-tax loss RM6.1m against RM7.5m loss in 1QFY20 attributed to lower average crude lifting price of USD39.4/bbl as compared to USD68.5/bbl in 1QFY20. This is despite a higher net lifting of 2.4mmboe (1.1mmboe in 1QFY20). Performance for this segment is expected to pick up as the development of SK408 Gorek and Larak has been completed and is ready to start-up, subject to Shell approval.
  • Narrowing loss. Despite the earnings improvement coupled with the expected cost savings of RM650m from the ongoing rationalization exercise, we foresee SapE’s outlook remaining uncertain, based on the current operating climate. Global oil majors are implementing capex reductions of 20% - 30% this year, putting the Group’s order book in hand (~RM14bn) as well as replenishments at risk. SapE’s earnings are unlikely to turn around in the near term. Activity levels remain low while profit margins could be volatile, depending on the work progress. We are narrowing our FY21/22 loss projections by 26.8% and 1.7% to RM448.5m and RM401.2m (from RM612.4m and RM408m), factoring in the impact of the cost rationalization and the higher 1QFY21 E&C margins. Our FY23 earnings are relatively unchanged.

    The Group also highlighted that it has received positive support from banks for the refinancing of its RM10.2bn in loans. With the target completion by end of this year, the loans are to be restructured into a tenure of up to 10 years which management hopes to see no increases in interest rate. Separately, the Group plans to raise an additional RM1.5bn of working capital, which will further stretch its already high current net gearing of 1.05x.

Source: PublicInvest Research - 30 Jun 2020

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