Investment Highlights

• We maintain our SELL call on Sapura Energy (Sapura) with an unchanged fair value of RM0.04/share, pegged on a 5-year P/BV trough of 0.1x on the group’s FY23F book value.

• Sapura’s FY20 results registered massive impairments and provisions of RM3.7bil, which stem from goodwill impairments of RM3bil from the engineering & construction (E&C) and drilling divisions, RM241mil fixed asset impairment and RM439mil provision in anticipation of extended project delays due to the impact of the Covid-19 pandemic and expectations for a prolonged sector recovery. We understand that there may be further provisions in FY21F as the exploration and production (E&P) segment did not make any substantive impairments, pending the audit of its JV partner, OMV.

• Excluding these one-off impairments and provisions, the FY20 normalised loss of RM855mil was worse than our and street’s expectations. Hence, we have raised our FY21F–FY2F losses by 12% to 22% on a RM500mil reduction in our revenue assumptions, as management has guided that RM600mil– RM800mil in engineering & construction and drilling income will be deferred from FY21F to FY22F due to slowdowns in work progress and clients’ requests.

• Excluding the impairments, Sapura’s 4QFY20 normalised loss of RM511mil stems largely from the lower E&C progress recognition and low margin exacerbated by higher subcontractor costs in a volatile oil price regime, together with a RM79mil loss from E&P from lower prices and provisions. In 4QFY20, normalised drilling operations managed to breakeven even though the 7 operational rigs represented only half of the group’s fleet.

• While Sapura’s outstanding order book dropped by 17% QoQ to RM13.5bil (2.7x FY21F revenues) largely due to the slow award of jobs in the current environment. The order book trajectory is likely to decline further with an annual depletion of RM5bil, even though the group is bidding for US$5.6bil of projects, a drop of 35% QoQ from US$8.6bil earlier. Despite slightly higher prospective tenders valued at US$10.6bil (vs US$9.3bil in 3QFY20), we remain cautious as clients are likely to postpone or cancel these projects if the current gloomy outlook persists, as management expects to last for 1–2 years.

• Following its massive losses, Sapura’s net gearing has risen from 0.7x in 3QFY20 to 1x currently, while negative net debt/FY20 EBITDA has breached debt covenants. Management is negotiating with its lenders to waive these terms. Under these stressed environment, Sapura is aiming to refinance its entire RM10bil debt with 14 financial institutions by the end of the year, with RM4.7bil of loan repayment scheduled within the next 12 months. Nevertheless, we do not discount further financial support from PNB, which currently has a 40% equity stake in Sapura.

• Given the stock’s high 2-year correlation coefficient of 72% to Brent crude prices amid a high net gearing of 1x, the stock currently trades at a low PBV of 0.1x.

Source: AmInvest Research - 30 Apr 2020