SAPE’s 1QFY19 core loss was due to poor rig utilisation. However, the all-time low revenue in 1QFY19 will improve in the coming quarters, based on orderbook visibility and rig recovery. Despite a wider near-term loss forecast, we note that the orderbook guidance now closely matches our assumption. SAPE’s new guidance for capital raising signals more mega contract wins, which is positive for future earnings. Its energy reserves will also have long-term upside. Maintain BUY. Target price: RM0.70.

RESULTS

1QFY19 core loss was a slight negative surprise vs our and consensus loss forecasts of RM119m/RM82m respectively, even though 2H is expected to be stronger. Sapura Energy (SAPE) recorded an all-time low quarterly revenue, a negative surprise due to a lower-thanexpected rig utilisation. There were only close to four rigs working, which is below the guidance of 5 out of 15 rigs working. The energy division realised a 1Q oil price of US$70/bbl at unchanged volumes of 1.1mmboe (1QFY18: US$52/bbl), and also average gas prices of >US$3.5/mcf. However, energy’s PBT declined despite the higher O&G prices due to the offsetting factors of higher depreciation and interest cost base. E&C activity was stable from the ramp up of new contracts secured, despite being a typically low season. Brazilian pipe-laying support vessels (PLSV) continued to be fully utilised, contributing to the JV line. Its net gearing remains at 1.6x, while cash balance declined significantly from RM1.7b to RM1.3b due to a lower EBITDA of RM0.2b and capex incurred for energy and drilling.

STOCK IMPACT

Rig updates. The wider rig loss was a negative surprise to us. Although we were aware that SKD Esperenza’s contract was completed and in transition for its new contract, the idle time was about 2 months and was longer than expected. Hence in 1QFY19, the rig utilization was closer to 4/15 tender rigs. We believe 2QFY19 will likely see 5 rigs working on SKD Alliance contract commencement in Apr 18. 2HFY19 will see six rigs working, as the incoming commencements of SKD Esperenza and SKD Berani will be offset by the expiry of SKD T- 17 by Jun/Jul 18. We believe utilisation recovery to 6-7 working rigs could enable the rig division to achieve profit breakeven. We understand rig charter rates have stabilised, after a decline of 30-40% from three years ago.

Orderbook unchanged qoq at RM16.7b. The orderbook recognition for the remainder of FY19/FY20 is at RM5.2b/RM3.8b. This compares to the previous guidance of RM5.6b/RM3.1b. These included the new contract wins, and the Brazilian PLSV JV contracts at RM2.2b p.a. (which falls under the JV/associate line).

Growing energy portfolio. On 27 June, SAPE signed a production sharing contract (PSC) with DEA Deutsche (the main operator) and Premier Oil for Block 30 within the Sureste Basin in the Gulf of Mexico. This was the block that the group secured recently, marking its energy penetration into Mexico. The resources need to be appraised. Along with exploration potential in New Zealand and further new gas field discovery in Sarawak, there is a potential addition on top of its net 2P reserves of 253mmboe once the final investment and gas sales agreement for the additional discoveries are developed.

Additional capital-raising being considered. The potential listing of the E&P division is still being considered. There is now a new guidance that SAPE is also looking at further capital raising exercise to strengthen its balance sheet, though no estimate and timeline is given. It could be a mixture of equities and other forms of capital-raising such as perpetual securities, infrastructure funds and convertible bonds. Although it is difficult to gauge if investors will perceive the capital raising needs positively, we view that the timing of this new information is a strong signal that SAPE is close to securing more mega contracts that will require capital support.

Largely on track with guidance. Recap that the group guided to boost orderbook to RM18- 20b within the year, and is also guiding for a flattish EBITDA growth from FY18 base of RM1.4b. We analyse that the remainder FY19 orderbook guidance translates into revenue of RM4.2b (assuming energy revenue at ~RM0.6b) for 2Q to 4QFY19, which implies that it is already close to our FY19 revenue assumption. Also, to meet the RM18b orderbook target, SAPE needs to secure another RM4b in contracts. This is necessary to boost FY20 revenue which has ~RM4b gap vs our FY20 revenue assumption.

EARNINGS REVISION/RISK

Downgrade FY19 loss forecast by 55% to RM185m,but retain FY20-21 profit forecasts. We have assumed a wider FY19 loss after lowering our rig utilisation assumption from 33% to 30%. However, we note that the group’s current FY19 orderbook guidance closely matches our revenue assumption. With this, we believe 2HFY19 performance will be stronger (possibly returning to profit breakeven) on the back of higher revenue/EBITDA from E&C and drilling (and higher rig utilisation).

Risks. Further decline in orderbook and lesser orderbook wins.

VALUATION/RECOMMENDATION

Retain SOTP-based target price at RM0.70. Our SOTP-based target price implies 39x FY20F PE and continues to assume a discount on rigs which are still loss-making. Our SOTP assumes a DCF valuation for the energy assets, assuming a long-term blended O&G price assumption of US$55/bbl and the group’s latest production profile (which has an upside bias once the new resources are appraised and added). This is offset by the debt attributed to energy (we assume 20% of the group’s borrowings, or US$0.7b).

Maintain BUY. SAPE’s outstanding international track record and contract wins are beginning to translate into a better outlook for activities and asset utilisation. Hence, the long-term risk-reward is gradually adjusting in E&C and energy. The stock also fits into our sector theme to invest in companies that are internationally competitive and do not have high local contract dependency. We still see a sustainable earnings recovery, as the rigs prospect is beginning to improve (removal of major downside earnings risk) and the momentum of future contract wins will be positive to long-term earnings.

Source: UOB Kay Hian Research - 2 Jul 2018