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 which implies an FY22F PE of 30x, within the group’s 5-year peak.

• While our FY22F earnings are maintained, we have lowered FY20F–FY21F EBITDA assumptions for Sapura’s engineering & construction (E&C) division by 2 percentage points as the division’s construction vessels are still operating below breakeven with a 3QFY20 utilization of 57% while 6 of the group’s 15 tender rigs remain cold stacked currently.

• Even though the fabrication yard’s utilization is currently operating at a high 80%, the low order intakes in 2017 and 1H2019 have left a temporary gap in the E&C division’s valuecreation process. Hence, FY20F loss has been raised by 20% while FY21F earnings halved. Nevertheless, we expect order flows to escalate on rising global offshore activities which will allow the group to partly recover its FY16 margins by FY22F.

• The group’s 9MFY20 normalized loss of RM346mil (-29% YoY) was below our earlier FY20F loss of RM421mil, which itself was already 52% above street’s RM276mil loss, largely due to weaker contributions from the E&C and drilling divisions.

• Sapura’s 3QFY20 normalized loss narrowed by 13% QoQ to RM101mil largely from a loss-driven positive tax charge and deferred tax overprovision. Nevertheless, 3QFY20 pretax loss widened 22% QoQ to RM113mil as E&C revenue shrank 4% on lower progress recognition and 32% drilling revenue drop from a decline in the utilization of 1 drilling rig to 5 rigs.

• Nevertheless, drilling losses could moderate in 4QFY20 as 7 rigs are currently being utilized with the commencement of T-10 and Jaya contracts. However, T-17 and Esperanza rigs will only be working with PTTEP in Thailand and Shell in Malaysia respectively in 3QFY21.

• Sapura has just announced RM615mil contracts and extensions: (i) E&C job for a Bergading wellhead platform, 7.3km pipeline to the Bergading central processing platform and subsea link for Hess’ North Malay Basin; (ii) transportation and installation of Christmas trees in deep water offshore Mozambique by Mozambique Rovuma Venture S.p.A; (iii) charter extension of Sapura Topazio by 4QFY20 by Petrobras; and (iv) charter extension for Sapura Esperanza to drill 6 wells for Malikai Phase 2 campaign off Sabah by Shell.

• We expect the RM3.7bil contracts secured this year so far to rise to over RM5bil soon. Nevertheless, the pace of new FY20F order intakes has substantively slowed from the RM9.3bil secured in FY19. Hence, Sapura’s outstanding order book slid 7% QoQ to RM15.1bil (2x FY21F revenues). Nevertheless, we are optimistic of the order book trajectory regaining the upward traction given the group’s current bids of US$8.1bil and prospective tenders of US$13.6bil.

• The stock currently trades at a low PBV of 0.3x currently vs. over 1x in the past years.

Source: AmInvest Research - 6 Dec 2019