Highlights

Sapura Energy - Above Expectations

Date: 21/09/2020

Source  :  PUBLIC BANK
Stock  :  SAPNRG       Price Target  :  0.10      |      Price Call  :  HOLD
        Last Price  :  0.125      |      Upside/Downside  :  -0.025 (20.00%)
 


Sapura Energy (SapE) reported positive 2QFY21 earnings with core net profit of RM23m, as compared to a core net loss of RM112.6m in 2QFY20. The performance was attributed to positive surprises from the Group’s E&C segment with pre-tax profit increasing 76% QoQ as margin expanded by 10ppt. Cumulatively, the Group recorded a slight net profit of RM3.3m for 1HFY21 as opposed to RM237.1m loss in 1HFY20, this coming about despite lower revenue of RM2.6bn (-27.6% YoY). The results are above our and consensus expectations of RM448.5m and RM453m core net losses respectively. While the current set of numbers appear to be positive, with SapE not as badly hit by the lower oil prices and movement restrictions due to Covid-19, we anticipate this performance may not be sustainable in view of the expected operating environment post-pandemic. With oil prices still relatively low, the worst may not be over yet for SapE. We narrow our FY21/22/23 loss projections to RM95m, RM286.7m and RM115.1m (from RM448.5m, RM401.2m and RM198.9m net loss respectively) nonetheless, factoring the positive earnings surprise from 2QFY21, though we maintain our Neutral rating. TP is slightly higher at RM0.10 following the earnings adjustment.

  • Beating expectations. The Group reported core net profit of RM23m in 2QFY21, turning around from a core net loss of RM19.7m in 1QFY21 and RM112.6m in 2QFY20. The performance was attributed to positive surprises from the Group’s E&C (Engineering and Construction) profit margins arising from USD20m in variation orders recognized during the quarter. Impact from cost rationalization exercises were also evident, in which RM450m worth of initiatives had been fully implemented via salary cuts, procurement savings, productivity efficiency and others.
  • Review. Performance for the quarter was supported by its E&C segment with pre-tax profit increasing 76% QoQ while margin expanded by 10ppt despite lower work volumes achieved (revenue -7.6% QoQ). In addition to the USD20m variation order recognition, increases in some spot orders were also seen. We do not see this improvement as sustainable for now however, with changes in operating procedures amid the current operating environment post-pandemic, as well as lower oil prices weighing on margins.

    Pre-tax loss in the Group’s drilling segment widened to RM32.4m from RM14.9m in 1QFY21 meanwhile, with revenue dropping 22.2% QoQ to RM187.4m. Rig utilization was 7 units and is expected to reduce to 5 in 2HFY21 as work is being suspended amid the current uncertain oil price environment. As for the E&P (Exploration and Production) segment, the division saw its losses widen to RM53.6m in 2QFY21 due to lower average realized oil price achieved at USD36.60/bbl (USD39.40/bbl in 1QFY21) as well as higher deferred taxation recognized despite of net lifting of 2.8mmboe (2.4mmboe in 1QFY21).
     
  • Outlook. Overall, we foresee SapE’s earnings outlook remaining uncertain and unlikely to return to sustainable profitability in the near term. Activity levels remain low while profit margins could be volatile depending on the work progress. We are narrowing our FY21/22/23 loss projections to RM95m, RM286.7m and RM115.1m (from RM448.5m, RM401.2m and RM198.9m net loss respectively) nevertheless, factoring in the positive surprise from 2QFY21.

Source: PublicInvest Research - 21 Sept 2020

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