nvestment Highlights

• We maintain our BUY call on Sapura Energy (Sapura) with an unchanged fair value of RM0.50/share, based on a 40% discount to its book value of RM0.87/share, which has accounted for its RM4bil rights exercise.

• Our FY20F-FY20F earnings are largely maintained as we expect the group’s earnings to gradually recover from a healthier balance sheet after its corporate and FY18 kitchen sinking exercise. While the group declared a surprise special dividend of 0.5 sen vs nil in FY18, we maintain our dividend forecasts given that adequate cashflow and working capital remain a key consideration for the group.

• Excluding RM2.7bil gain from the sale of a 50% stake in its exploration and production (E&P) segment to OMV, RM1.4bil impairment for older drilling rigs/marine vessels, RM61mil ESOS fair value recognition and RM108mil goodwill impairment for its subsea/Australian operations, the group’s FY19 normalised loss of RM883mil (2.7x YoY) was worse than expectations - 61% above our forecast and further way at 2.9x vs consensus.

• Sapura’s 4QFY19 normalised loss surged to RM590mil from RM31mil from RM176mil one-off provision for older marine vessels for a local project, decline of 1 working rig QoQ to 6 while average crude oil price fell US$17/barrel QoQ to US$62/barrel for the E&P segment.

• Earnings prospects for the E&C segment is improving amid better vessel utilization while the fabrication yard utilisation is expected to surge 5.8x YoY from 5K tonnes in 2018 to 29K tonnes in 2019 and subsequently accelerate further by 28% to 37K tonnes in 2020.

• While the drilling segment’s depreciation costs have fallen in tandem with its asset impairments, market conditions still need to significantly improve as Sapura needs to charter out 8-10 of its 16-rig fleet to achieve breakeven vs. 6 in 4QFY19.

• The 5-year firm charters for 2 of the group’s 50%-owned Petrobras multi-purpose flexible pipe-lay vessels – Diamante and Topazio - are expected to expire in June and September this year. Even though there are 5 annual extension options by the client, Sapura expects lower charter rates in negotiations expected to be concluded later this year. Hence, we are projecting a 30% earnings decline for the group’s 6 Petrobras vessels this year.

• However, we expect the 3x YoY surge in the 50%-owned E&P production to 12mil barrels in FY21F to mitigate the likely earnings decline in the Brazilian operations.

• The RM9.3bil new jobs secured in FY19 have increased Sapura’s outstanding order book by 4% YoY to RM17.2bil – 3.2x FY20F revenues. This is expected to grow as the group’s tenders have escalated 3.5x YoY to US$11bil, driven by the new markets in Middle East and Africa which now accounts for 56% of the bid book. The stock currently trades at a low FY21F PE of 15x and PBV of 0.4x currently.

Source: AmInvest Research - 26 Mar 2019