Investment Highlights

• We maintain our BUY recommendation on Sapura Energy (Sapura) but with a lower fair value of RM0.79/share (from an earlier RM1.00/share), widening the discount to our revised FY19F book value from 40% to 50% given the group’s expected persistent losses over the medium term.

• We have raised FY19F loss by 3x while lowering FY20F net profit by 28% and FY21F earnings by 9% from higher operating cost assumptions for the group’s Exploration and Production (E&P) division together with lower margins for the drilling segment.

• Our lowered forecasts stem from Sapura’s 1QFY19 normalised loss of RM136mil coming in below expectations, which already dwarfs our earlier FY19F loss of RM36mil and consensus’ RM82mil.

• Sapura’s 1QFY18 normalised loss surged 4.7x QoQ to RM136mil largely due to a sharp 66% QoQ drop in E&P pre-tax to RM9mil as the proportion of lower-monetised gas rose to 40% of the group’s 1.1mil barrels of oil equivalent (unchanged QoQ), leading to the E&P revenue decrease of 27% QoQ.

• The 12ppt E&P EBITDA margin improvement to 56% partly cushioned the revenue contraction, as the division’s 1QFY19 EBITDA decreased by only 8% QoQ to RM118mil. However, this was a major disappointment as the higher SK310 B15 depreciation, based on a limited field life of 5.5 years, coupled with increased interest charges have drastically exacerbated the earnings impact.

• Additionally, the drilling division’s loss rose by RM17mil even though the number of working rigs was unchanged QoQ at 5, as the semi-tender rig Esperanza was unutilised for 2 months following a contract renewal with Shell. Going forward, 6 rigs will be in operation in 2QFY19 as the semi-tender rig Alliance was mobilised last month with Shell Brunei. Unless Sapura secures additional charters, 6 rigs will still be operational in 2HFY19F as the commencement of semi-tender rig Berani in 3Q2018 will be offset by the expiry of one of the existing short-term charters.

• The Engineering and Construction (E&C) unit rebounded to a profit of RM37mil due to the associate contribution from the 6 Petrobras pipe-laying support vessels. Excluding associate contributions, the E&C division would have registered a loss of RM70mil due to the low yard utilisation currently

• The RM4.5bil of fresh contracts secured in FY19F to date already account for 71% of our FY19F revenue, while the Sapura’s outstanding order book has slightly risen by 1% QoQ to RM16.7bil, with additional orders expected from tender prospects worth up to US$13.1bil (RM52bil).

• The excitement from the proposed listing of Sapura’s E&P operations may be partly mitigated by the group considering a potentially dilutive capital-raising exercise which may involve a rights issue together with quasi-debt instruments for working capital to undertake the multiple projects which are beginning to roll out against the backdrop of higher oil prices.

• Nevertheless, the stock still trades at an unjustified PBV of 0.4x currently vs. 0.9x for Bumi Armada.

Source: AmInvest Research - 2 Jul 2018