Sapura Energy - RM840m Contract Wins

Date: 18/09/2020

Source  :  HLG
Stock  :  SAPNRG       Price Target  :  0.09      |      Price Call  :  SELL
        Last Price  :  0.125      |      Upside/Downside  :  -0.035 (28.00%)

Sapura has secured three contract win/extensions (2 E&C and 1 drilling) with a combined value of RM840m. The job wins were within our expectations. Hence, we made no changes to our earnings forecasts. All in, maintain SELL rating on the stock with unchanged TP of RM0.09 pegging to unchanged 0.2x FY20 P/B. We expect 2QFY21 results to be weaker than 1QFY21 due to logistical and operational issues from MCO and its high net gearing remains a key concern.


Sapura Energy has announced three contract wins: (i) EPCI for AMOCA platform by ENI Mexico; contract scope of work comprises the transportation and installation of Amoca Platform and the pipeline and subsea cable scope work interconnecting the Amoca and Mizton platforms and FPSO, (ii) 12-month extension of contract for the charter and operations of Pipe Laying Support vessel Sapura Esmeralda from Petrobras and (iii) Award of contract for Tender Rig Sapura Berani by Foxtrot International for 9 months, commencing in 1QFY22. The three contracts secured are worth an estimated RM840m.


Contract wins does not guarantee positive earnings impact. While we view the contract win/extension as a positive development for Sapura, we believe that there are still risks with regards to the execution of these contracts due to the current O&G climate. Sapura has experienced a negative EBIT margin for both its E&C and drilling segments for the most part of FY20 and we believe that social distancing requirements from MCO would negatively affect its operations and the border restrictions would result in logistical issues with regards to the delivery of its E&C projects.

Weak financial position a key concern. We believe that Sapura’s financial position remains weak at this juncture due to its huge borrowings and the Company needs to refinance its short-term debt imminently. As of 1QFY20, its net gearing stood at 1.05x with a cash balance of RM711m and a short-term debt of RM3.5bn (c.50% unsecured). We believe that its earnings would be required to grow substantially for it to be able to refinance its borrowings at more favourable rates.

Forecast. We make no changes to our forecast as the contract wins were within our expectations.

Maintain SELL, TP: RM0.09. We maintain our SELL call with an unchanged TP of RM0.09 based on 0.2x FY20 BVPS (below -1SD from 5-year mean P/B) as we remain cautious on its balance sheet and gearing despite its contract wins. Net gearing of 1.05x (4QFY19: 1.03x) has actually worsened in 1QFY21, despite core losses narrowing. We do not foresee Sapura ending the year in the black due to the volatility and uncertainty of the current oil market.


Source: Hong Leong Investment Bank Research - 18 Sept 2020

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