Investment Highlights

• We maintain our BUY recommendation on Sapura Energy (Sapura) with an unchanged fair value of RM0.29/share, pegged to a 50% discount to its FY21F book value. This valuation reflects a neutral ESG rating of 3 stars.

• However, we have raised our revenue and margin assumptions for the group’s engineering & construction (E&C) division, which turned around our projection of an FY22F loss of RM101mil to a net profit of RM54mil, and tripled FY23F net profit to RM147mil.

• In our past updates, we have highlighted the likelihood of Sapura registering a 4QFY21 loss from the normalisation of E&C margins after reporting minor profits consecutively over 3 quarters. However, the group’s FY21 loss of RM161mil was 45% below our loss estimate of RM290mil and 43% above street’s RM113mil. Hence, the results came in above our expectations but below street’s.

• While the group did not make any provision for asset impairments, Sapura bore additional Covid-19-related costs of RM239mil from quarantine, tests and productivity losses in 4QFY21 together with progress delays which further led of oneoff expenses of RM149mil for work unusually required to be undertaken during the monsoon season.

• Excluding these costs, we note that Sapura could have registered an FY21 net profit of RM227mil instead from substantive cost reduction measures implemented over the past 2–3 years, notwithstanding a revenue reduction of 17% to RM5.3bil. As the Covid-19 pandemic remains a concern, some of the costs, estimated at RM50mil per quarter, could recur for contracts which were secured before the viral outbreak.

• Nevertheless, we are encouraged by this strong 4QFY21 performance given that the new group CEO Datuk Mohd Anuar Taib, who took over the helm from founder Tan Sri Shahril Shamsuddin on 23 March this year, would likely start off on a clean slate after kitchen-sinking most of the one-off expenses and asset impairments accrued from the previous management.

• Looking forward, the asset utilization of the E&C segment, which accounted for 86% of FY21 revenue, is expected to improve with construction vessels rising to 60% in FY22F from 49% in 4QFY21 while the yard remains around 48%–50% with 49 ongoing projects vs. 20 completed jobs in FY21.

• The performance of the drilling segment, which accounted for 14% of FY21 revenue with only 6 working rigs, is also expected to improve with 1 additional rig, T-9, to be deployed this year.

• The 50%-owned Brazil operations, which registered a FY21 net profit of RM154mil, could also improve as all 6 flexible pipe-lay support vessels could be deployed this year with Sapura Diamante in Coral South Field, Rovuma Basin off Mozambique and Topazio at the Marlim field in Brazil. Likewise, the 50%-owned Sapura OMV Upstream JV with OMV is also poised for better earnings prospects after registering a FY21 loss of RM38mil, with 4QFY21 production rising 10% QoQ to 3.2mil barrels of oil equivalent while crude oil price has risen to above US$60/barrel currently from an average of US$46/barrel.

• At this stage, 80% of the group’s FY22F revenue has already been secured by Sapura’s remaining order book of RM13.7bil (+10% QoQ). This includes the RM1bil contracts, which were announced yesterday, for the variation of the engineering, procurement, construction and installation job for the Pegaga development field’s mercury removal unit; 3 wellhead platforms pipelines and subsea package for Package B’s Phase 4A facilities of the North Malay Basin development together with another wellhead platform job for Brunei’s Egret East Project; supply and maintenance of Petronas Dagangan’s point of sales and automation systems for petrol stations, transportation; and installation of pipelines for the Bakau NAG and Bayan Gas Redevelopment Phase 2 development projects under the Pan Malaysia Transport and Installation of Offshore Facilities programme. The group is currently bidding or looking at projects worth RM123bil (+15% QoQ) of which tender submissions have reached RM31.5bil, 2.2x outstanding order book.

• Additionally, the group has recognised cost savings of RM430mil (2.7x FY21 loss), over half of the RM760mil cost optimisation programmes which have been implemented thus far. There may be more savings to come as these represent 58% of the RM1.3bil planned initiatives involving commercial renegotiations, operational productivity, procurement, human resources and working capital.

• Against the backdrop of improving prospects of new jobs across the globe, improving cost structure and underpinned by a revitalised RM10bil debt structure amid more optimistic crude oil prices, the stock currently trades at an undeserved fire-sale 0.2x PBV for an integrated oil & gas operator with an established regional footprint and proven delivery record.

Source: AmInvest Research - 28 Apr 2021