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, our FY20F–FY21F EBITDA assumptions for Sapura’s engineering & construction (E&C) division has been lowered by 2–3ppts 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 10%–25% completion stage, even though the fabrication yard utilization 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 raised FY20F loss to RM421mil from RM39mil loss and cut FY21F earnings by 30%. However, we maintain FY22F earnings as the group’s higher recognition of the E&C jobs will reach its highest margin recognition cycle by then.

• Even though our earlier FY20F loss of RM39mil was substantively below consensus’ net profit RM66mil, the group’s 1HFY20 normalized loss of RM243mil (-37% YoY) for its ongoing operations came in below both our and consensus’ expectations largely due to the 1.8ppt QoQ decline in 2QFY20 E&C margin.

• Sapura’s 2QFY20 normalized loss declined by 8% QoQ to RM116mil largely from the lower E&C margin which cut the division’s pretax profit by 43% QoQ to RM27mil. This was partly offset by drilling losses decreasing by 30% QoQ to RM36mil from an additional rig being utilized to 6 out of 16 in the fleet.

• The drilling segment’s losses is expected to narrow further in 2HFY20 as its utilization of rigs could reach 7–8 with the commencement of the charter of T-10 and Jaya rigs in Malaysia and Thailand in 3QFY20, while T-17 will be deployed in Angola in 1QFY21F.

• Exploration and production (E&P) output rose 27% QoQ to 1.4mmboe together with crude lifting price rising by US$2/barrel to US$71/barrel. 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 RM3.1bil new jobs secured this year include the RM774mil new contracts announced last Friday which take into account works for the Salman development project in Brunei, the Bardegg-2 and Baronia enhanced oil recovery projects for Petronas Carigali, a new rig charter for T-17 and contract extensions for Sapura Berani and Pelaut.

• While Sapura’s outstanding order book slid 6% QoQ to RM16.3bil (2.4x FY20F revenues) on higher progress recognition vs. new jobs, it is expected to regain its upward traction as the group’s current bids have risen by 26% QoQ to US$8.6bil while additional prospective tenders increased by 16% QoQ to US$9.3bil.

• The stock currently trades at a low PBV of 0.3x.

Source: AmInvest Research - 30 Sept 2019