Highlights

• Weak 9MFY18 results: To recap, Sapura Energy (SAPE) 9MFY18 bottom-line swung to losses due to weak Engineering and Construction (E&C) and low rig utilization in drilling division. The weak result was partially offset by stronger performance in Energy division due to higher average lifting oil prices and higher production volume.
• E&C: The latest order book (including JV level order book) is c.RM16b and c.RM1.2b is expected to be recognized in 4QFY18. As a result, FY18E E&C revenue is forecasted to be c.RM4.5b, remain flattish yoy. Tender book currently stand at c.US$9.5b with about US$5b tenders at late-stage bidding. SAPE is expanding its footprint to Middle East and Africa to improve its contract bidding prospect.
• Drilling: Rig utilisation rate was at all-time low of 33% in 3QFY18 and is expect to improve once SKD Alliance commences its new contract in April 18. Prospect for this division still remain challenging due to oversupply of rigs which we do not foresee will improve significantly in the near term.
• E&P: SAPE completed the field development of the B15 gas field in Oct 2017 and gas production will begin from 4QFY18. Development of SK408 is on track with first gas for Gorek and Larak expected in 2020-2021. The potential monetising of the energy division is a major catalyst for SAPE in the near term.

Forecasts

• Cut FY18-20 earnings forecast from profits to losses after taking into account stronger ringgit exchange rate, lower order book replenishment and lower drilling rigs utilisation rates assumptions.

Risks

• Execution risk;
• Prolonged low oil price;
• Delay in contract award.

Rating

HOLD ↔ , TP: RM0.67

• Near term headwinds persists for the group with a gap still to be closed to maintain its revenue base. Weak rate outlook for tender rig division and margins for E&C segment has weighed on the company?s near term earnings outlook. Nevertheless, the company is a direct beneficiary of current improving oil price as a major integrated oil field service provider and its crown jewel E&P segment.

Valuation

• Maintain HOLD call with a lower TP of RM0.67. Our valuation methodology is now switched to P/NTA from PBV due to possibility of impairment for SAPE drilling assets. Our assumption of 1.0x P/NTA multiple is pegged to FY19F NTA.

Source: Hong Leong Investment Bank Research - 19 Feb 2018