Investment Highlights

• We maintain our SELL call on Sapura Energy (Sapura) with a slightly higher fair value of RM0.05/share (from RM0.04/share), pegged to 0.2x the group’s FY22F NTA. The group could still experience multiple bumpy rides ahead with potential losses in the upcoming quarters from potential revenue deferrals of RM600mil– RM800mil from the engineering & construction (E&C) and drilling operations due to work progress slowdowns and clients’ requests.

• We have cut Sapura’s FY21F–FY2F losses by 41%–73% and reversed FY23F back to a profit of RM45mil, from a 2–3-percentage point improvement in the E&C division. The improved forecasts stemmed from the better-than-expected 1QFY21 normalised net profit of RM14mil vs. our earlier FY21F loss of RM494mil and consensus’ RM567mil.

• Excluding a net forex gain of RM34mil, Sapura would have registered a 1QFY21 loss of RM20mil, still substantively better than the normalised 4QFY20 loss of RM950mil. This stemmed from higher asset utilisation rates, which increased E&C revenue by 30% QoQ to RM1.1bil, while exploration and production (E&P) losses narrowed to only RM6mil from RM79mil previously due to a 71% QoQ rise in upstream production to 2.4mil boe, partly offset by its lifting crude oil prices dropping by 43% QoQ to US$39/barrel.

• This drove the 1QFY21 E&C pretax margin to a surprisingly high 11%, which Sapura has only been able to achieve 1%–5% over the past 2 years before the unprecedented Covid-19 pandemic. As such, we are uncertain whether the group will be able to maintain such a strong margin performance in the subsequent quarters as management’s cost-saving plan of RM650mil for opex and RM150mil for capex this year may not materialise so soon.

• The drilling division is expected to extend further losses, as the number of working rigs could drop to 6 in 2QFY21 from 7 in 1QFY21. The Jaya unit has been declared under force majeure since April this year while the flexible pipelay vessel Sapura Diamante will drop out of charter in 4QFY21 during the transition from Mexico to Africa.

• Sapura’s outstanding order book surprisingly rose 4% QoQ to RM14bil (2.9x FY21F revenues), which management indicated could have stemmed from a weaker MYR as the group has only announced new jobs worth RM766mil this year while 1QFY21 revenue was higher at RM1.4bil. Even though the group is bidding for RM27bil of new jobs with an additional prospective projects worth RM35bil, the order book could still decline as clients are likely to postpone or cancel these projects if the current gloomy offshore outlook persists.

Source: AmInvest Research - 30 Jun 2020