Investment Highlights

• We maintain our SELL call on Sapura Energy (Sapura) with an unchanged fair value of RM0.05/share, pegged to 0.2x the group’s FY22F NTA.

• We maintain our forecasts even though the group’s 1HFY20 normalised net profit of RM38mil appears to be well ahead of our FY21F loss of RM290mil, which is 36% below consensus’ loss of RM453mil.

• This is because the 2QFY21 results include cost reversals from variation orders and contract adjustments from project completions amounting over US$20mil (RM82mil). Excluding these additional revenues together with net forex gain of RM35mil, the results translate to a 1HFY21 loss of RM79mil.

• These contract adjustments and cost reversals drove up 2QFY21 engineering and construction (E&C) pretax margin to 21% from just 1.6% in 2QFY20, even though the segment’s revenue fell 38% YoY to RM1bil. We believe the group’s 1QFY21 E&C pretax margin of 11% included some elements of cost reversals as quarterly margins have never reached 10% over the past 2 years.

• Sapura’s 2QFY21 drilling losses doubled QoQ to RM32mil despite 7 rigs in operation with 8 stacked units, similar to 1QFY21. This segment’s losses are expected to widen further as the number of rigs expected to be in operation is expected to drop by 2 to only 5 in 2HFY21.

• The exploration & production (E&P) losses accelerated 8.8x QoQ to RM54mil due to deferred tax provisions and 7% QoQ decline in lifting crude oil prices to US$37/barrel. This was partly offset by a 17% QoQ increase in production to 2.8mil barrels of oil equivalents.

• While management indicated that cost reversals are part of E&C business, we do not view such items as recurring given that all oil & gas operators are currently in a cost-reduction programme against the backdrop of a low crude oil price outlook.

• The group has implemented RM450mil cost optimisation measures so far out of RM1.1bil planned initiatives involving commercial renegotiations, operational productivity, procurement, human resources and working capital. Of these, 23% involved cash savings which management indicated had direct impact to the group’s 1HFY21 bottom line.

• Sapura’s outstanding order book decreased 5% QoQ to RM13.3bil (2.8x FY21F revenues), as the recent new wins of RM840mil was insufficient to offset the 2QFY21 depletion of RM1.2bil. Even though the group is bidding for RM29.4bil of new jobs with an additional prospective projects worth RM63bil, the order book could still decline over the next 2 quarterly as clients are likely to postpone the awards until next year if the current gloomy offshore outlook persists.

• The group still views substantive provisions as less likely under the improved oil price environment compared to midMarch this year, notwithstanding the pending audit of its E&P segment by its JV partner, OMV. However, we do not preclude the possibility of an equity-raising exercise pursuant to management’s plan to refinance its RM10bil debt with 14 banks by December 2020. The group has secured 80% to date of the additional working capital of RM1.5bil for its ongoing and prospective projects.

• Given the prospects of further losses in the coming quarters, the stock currently trades at a low 0.2x PBV.

Source: AmInvest Research - 21 Sept 2020