Investment Highlights

• We maintain our SELL call on Sapura Energy (Sapura) with a lower fair value of RM0.04/share (from RM0.07/share previously), pegged to a 5-year P/BV trough of 0.1x but based on the group’s FY22F NTA of RM0.36/share.

• Trading at distressed valuations currently, we have shifted our valuation methodology from BV to NTA given that Sapura’s goodwill and intangible assets account for 54% of FY22F shareholders funds.

• We reiterate our current bleak outlook for service providers as much worse than the 2015–2017 period when crude oil prices fell below US$30/barrel, eventually causing Sapura to resort to a massive RM4bil recapitalisation exercise in 2018.

• This is likely to recur as the group is still struggling to recover from the aftermath of the previous cyclical price collapse with a projected FY20F consensus loss of RM439mil due to the dislocation of fresh fabrication, offshore installation work orders and dismal rig utilisation rates over the past 2 years.

• Currently, Sapura’s utilisation rate for its loss-making fleet of 16 rigs is already below 40% even before the present crisis stemming from the Covid-19-dampened demand against the backdrop of a Saudi-Russian oil war. Additionally, the 5-year fixed charters for two of Sapura’s 50%-owned Brazil-based flexible pipe lay support vessels, Sapura Diamante and Topazio, are still waiting to be renewed on long-term basis while the existing contract for Sapura Onix will expire in June this year.

• Hence, we have reversed our FY21F–22F earnings to losses due to a 30% cut in new order assumptions for its engineering & construction segment, 20% decrease in drilling rig revenues from lower utilisation and charter rates together with lowered crude oil forecast to US$40/barrel from US$60/barrel for the 50%- owned exploration and production division.

• While Sapura’s outstanding order book of RM16.3bil (2.4x FY20F revenues) provides some future revenue visibility, margins remain low due to the intense competition and the early-cycle construction phase.

• Without a substantive increase in fresh orders to boost progress recognition, we do not expect Sapura to be able to break even in FY21F–22F as global exploration, development and production capex will be postponed or cancelled in a low price environment in which the worst has yet to come.

• While Sapura’s 4QFY20 results’ announcement, which was scheduled for yesterday, has been postponed to later this month, we expect Sapura’s FY20F core earnings to generally come in within our forecasted loss of RM503mil, which is 15% higher than general consensus. Nevertheless, we acknowledge that the group may need to make one-off non-core asset provisions due to the recent plunge in crude oil prices.

• The stock currently trades at a distressed FY22F PBV of 0.1x due to its persistent losses and high gearing of 0.7x.

Source: AmInvest Research - 1 Apr 2020