Investment 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.

• However, we have lowered our earnings forecasts on lower assumptions for Sapura’s Engineering & Construction (E&C) EBITDA margin as major central processing platform jobs for the Pegaga field off Sarawak and KG-DWN 98/2 NELP block off India are still at an early 25%-30% completion stage, even though the fabrication yard utilisation is expected to surge 5.8x YoY to 29K tonnes in 2019 and subsequently accelerate further by 28% to 37K tonnes in 2020.

• Hence, we have reversed FY20F earnings to a RM39mil loss and cut FY21-FY22F earnings by 29% as the group’s 1QFY20 normalised loss of RM127mil (-6% YoY) came in below expectations vs our earlier FY20F earnings of RM105mil and consensus’ RM130mil.

• Sapura’s 1QFY20 normalised loss dropped 79% QoQ from the absence of a 4QFY19 one-off provision of RM176mil for older marine vessels for a local project, higher E&C revenue recognition, 27% decrease in depreciation due to impairments in the previous quarter and 17% reduction in interest costs. This was partly offset by one-off adjustments for the previous US$896mil acquisition of the New Field asset back in 2014.

• While the drilling segment’s depreciation costs have fallen in tandem with its asset impairments, market conditions still need to significantly improve as this division needs to charter out 7-8 of its 16-rig fleet to achieve breakeven vs. 5 in 1QFY20 which registered a loss of RM51mil.

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

• The RM2.3bil new jobs secured this year excludes the 10 new contracts worth RM1bil for its E&C and drilling operations, which includes the group’s first offshore wind farm contract from Taiwan’s Yunlin Offshore Wind Farm, 6-year EPC work for Petronas’ fixed offshore structure works, 3 rig contracts for Sapura Esperanza, T-10 and T-18, transport and installation of subsea flexible pipelines for JX Nippon Oil & Gas’ Layang project, subsea services for Cooper Energy’s Casino Henry and Netherby Electrical Backbone Repair project, EPCI for PTT E&P’s FS02 riser hose replacement and ROV services for the Bongkot and Arthit gas fields in Thailand and light well intervention services for Woodside Energy in the North West Shelf, Australia.

• Including these would raise Sapura’s outstanding order book by 6% to RM18.2bil – 3.4x FY20F revenues. This is expected to grow as the group’s current bids of US$6.8bil could raise the order book by the end of FY20F by 16% assuming a success rate of 30%.

• The stock currently trades at a low PBV of 0.4x currently.

Source: AmInvest Research - 28 Jun 2019