Investment Highlights

• We maintain our HOLD recommendation on Sapura Energy (Sapura) with a lower fair value of RM1.00/share (from an earlier RM1.54/share), by widening the discount to FY19F book value from 30% to 50%.

• We have reversed our earlier earnings projections to a loss of RM563mil in FY18F and RM392mil in FY19F due to cuts in our drilling rig utilisation assumptions from 50% to 40% together with a 30% cut in new order book assumptions. As a comparison, consensus estimates a net profit of RM88mil for FY18F and RM224mil for FY19F.

• Excluding a RM46mil loss from the acquisition of the remaining 50% stake in SapuraAcergy at below book valuation, Sapura’s 9MFY18 normalised loss of RM172mil (vs. a RM343mil net profit in 9MFY17) was a shock as the group suffered a 3QFY18 normalised loss of RM228mil. This occurred even though Sapura’s strongest quarters are in the second and third quarters due to the usual lower asset utilisation rates during the monsoon season in the first and fourth quarters.

• The group’s two core operations – engineering & construction (E&P) and drilling – suffered losses while even the exploration and production (E&P) division, which should have fared better in a higher crude oil price environment, registered a sharp drop in earnings. This was further exacerbated by a much higher 3QFY18 tax charge of RM66mil due to the group profitable entities and upstream production levies vs. only RM4mil in 2QFY18.

• QoQ, Sapura’s 3QFY18 revenue slid 23% to RM1,280mil from lower rig utilisation as only 5 rigs were in operation vs. 6 in 2QFY18 when the semi-submersible tender rig SKD Alliance dropped out of charter together with the decline in offshore construction activities as the new Pan Malaysia contract started towards the end of the quarter. The commencement of SKD Alliance’s charter with Shell in April 2018 on a 5-year firm contract with another 5 annual extensions offer scant relief for 4QFY18 and 1QFY18.

• Even though the E&P division’s revenue rose 28% QoQ from the US$8/barrel increase in average crude price to US$58/barrel and a 12% increase in production to 0.9mil barrels, the segment’s pretax profit plunged 61% QoQ to RM9mil from the absence of oneoff cost write-backs in 2QFY18.

• The commencement of 100mil cu ft/day gas production from the group’s 30%-owned SK310 B15 development is expected in November this year. However, with oil price above breakeven at US$58/barrel currently and the field life of only 5½ years, we estimate that the high depreciation charge on the US$300mil capex is likely to translate to a marginal contribution to Sapura from 4QFY18 onwards.

• The group’s order book was flat QoQ at RM15.1bil while the pace of awards remains tepid although the group is hopeful of further wins with higher tender prospects of US$9.5bil (vs. US$8.2bil in 2QFY18). Given the likelihood of additional asset impairments in 4QFY18, we view the 53% discount to book value as justified.

Source: AmInvest Research - 8 Dec 2017