Investment Highlights

• We maintain our HOLD recommendation on Sapura Energy (Sapura) with a lower sum-of-parts-based fair value of RM1.72/share (from RM1.83/share), which implies a 20% discount to book value.

• We have cut FY18F-FY20F earnings by 23%-44% due to a 20%- 40% reduction in drilling rig utilisation assumptions to 40%- 60%. Our FY18F-FY20F earnings, which were already below market expectations, are now 35%-44% below consensus.

• Sapura’s 1HFY18 normalised net profit of RM56mil came in below expectations, accounting for 30% of our earlier FY18F earnings and 25% of consensus, vs. 67%-92% for 1HFY15- 1HFY17.

• QoQ, Sapura’s 2QFY18 revenue slid 6% to RM1,656mil, from lower rig utilisation as only 6 rigs were in operation vs. 7 in 1QFY18 and US$2/barrel decline in average crude price to US$50/barrel for the exploration & production division.

• During the quarter, 6 rigs were in operation compared to 10 stacked rigs, translating to a utilisation rate of only 40% in a fleet of 15. As the tender rig T-12 will be dropping out of Chevron’s contract next quarter, the group’s rig utilisation will drop further to 33%. This portends to weaker bottom lines from 3QFY18 onwards vs. a RM85mil drilling loss in 2QFY18. But this could slightly improve by 2QFY19 as the semi-tender Alliance is expected to commence for Shell Brunei in April 2018 for its 5- year charter.

• Mechanical downtime in the 50%-owned Petrobras vessels and lower activity levels for 50%-owned SapuraAcergy led to a 33% QoQ contraction in associate contribution. With the lower rig revenues, this led to a sharp 68% QoQ plunge in 2QFY18 pre-tax profit to RM34mil. However, a deferred tax overprovision credit of RM19mil led to a 5% increase in 2QFY18 net profit of RM29mil instead.

• For the engineering and construction division, which was the main group earnings contributor, its 2QFY18 revenue rose 5% QoQ while tight competitive pricing cut pre-tax margin by 5ppts to 10%. The exploration and production revenue fell 17% QoQ but managed to improve its pre-tax profit by 1ppt to 14% partly through cost improvement measures.

• The commencement of 100mil cu feet/day gas production from the group’s 30%-owned SK310 B15 development is expected in November this year. However, with near pre-tax breakeven oil price at US$50/barrel currently and the field life of only 5½ years, the high depreciation charge on the US$300mil capex is likely to translate to a marginal contribution to Sapura from 4QFY18 onwards.

• In the absence of significant new order wins, the group’s order book has decreased 11% QoQ to RM15.1bil. The group is hopeful for further wins with tender prospects worth US$8.2bil (RM35bil) but the pace of awards is still slow currently. The stock currently trades at a pricey FY19F PE of 44x but this is cushioned by its 24% discount to book value of RM2.12/share.

Source: AmInvest Research - 28 Sept 2017