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.

• Given the continuing impact of the viral pandemic, we lower FY22F–FY24F earnings by 12%–16% due to higher operating costs together with increased production cost assumptions for the group’s 50%-owned exploration and production (E&P) arm, Sapura OMV.

• Sapura’s 1QFY22 normalised loss of RM49mil (which excludes RM48mil one-off items for unamortised borrowing costs and dedesignation of hedging instruments) was below expectations vs. our earlier FY22F net profit of RM54mil and street’s loss of RM57mil.

• The group also registered forex losses of RM43mil and Covid19-related costs of RM42mil from quarantine, tests and productivity losses in 1QFY22. Excluding these items, 1QFY22 could have turned around to a net profit of RM35mil – 65% of our earlier FY22F net profit.

• Even with the Covid-19 expenditures, the group’s 4 core divisions still turned around to profitability in 1QFY22 from 4QFY21 normalised loss of RM193mil. With average crude oil price rising by 39% QoQ to US$64/barrel from US$46/barrel and production rising by 9% QoQ to 3.5mil boe, E&P generated slightly higher earnings than the engineering and construction (E&C) division, with both segments making up 81% of 1QFY22 operating profit.

• E&C rebounded to a 1QFY22 pretax profit of RM51mil as margin recovered to 4.5%. This is despite revenue declining by 11% QoQ as yard utilisation dropped to 38% from 48% in 4QFY21, partly offset by heavy vessel utilisation rising to 52% from 49%. Meanwhile, the reclassified operation & maintenance segment, which offers hook-up & commissioning, geosciences, turbomachinery and technical services, delivered a slight contribution of RM3mil.

• The drilling segment, which accounted for 17% of 1QFY22 operating profit, also rebounded from a 4QFY21 loss of RM61mil with the additional utilisation of the T-9 rig. Even with 7 stacked rigs, which are earmarked for disposal, this division is likely to continue to be profitable as 7 rigs are expected to be deployed over the next 2 quarters.

• However, its 50%-owned JV with Seadrill for 6 flexible pipelay vessels registered a QoQ halving of 1QFY22 net profit to RM12mil as Sapura Jade was drydocked in February 2021 while Diamante completed its Eni contract in Mozambique, Africa.

• At this stage, 77% of the group’s FY22F revenue has already been secured by Sapura’s remaining order book of RM11.8bil, which has declined by 14% QoQ as the latest award in April this year had already been accounted in the previous results briefing. The briefing was delayed by a month (permitted during Covid-19 restrictions). Nevertheless, Sapura is currently bidding or looking at projects worth RM147bil (+19% QoQ) of which tender submissions have reached RM51bil, 4.3x of its outstanding order book.

• Against the backdrop of improving prospects for new jobs across the globe, better 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 - 30 Jun 2021