Sapura Energy’s 1QFY19 core net losses of RM165.7m came below expectations on weaker-than-expected E&C contribution. While orderbook and tenderbook remained flattish QoQ at RM16.7b and USD13b respectively, the company is aiming to strengthen its financial position via potential listing of E&P arm and possible capital raising exercise. Following the transfer of coverage, we expect Sapura Energy to widen its core losses by 7% YoY to RM269.8m in FY19 and turnaround with RM16.0m in FY20. In all, maintain HOLD rating with lower TP of RM0.62 pegging to 0.4x FY20 P/BV.

Below expectations. After stripping off RM30.0m unrealised forex gain, 1QFY19 core net loss amounted to RM165.7m. This was below expectations compared our previous FY19 core loss projection of RM3.4m (consensus: RM82.2m). The disappointing results were largely due to weaker-than-expected E&C contribution. No dividend was declared, as expected.

Core losses widened by 4x QoQ. Sequentially, Sapura widened its core net losses by 4x QoQ to RM165.7m in 1QFY19 no thanks to (i) higher losses (+31% QoQ) for drilling segment as a result of lower utilisation of Esperanza which was only working for one month, (ii) weaker energy segment (-66% QoQ; lower oil production masking higher contribution from B15 despite higher average lift oil prices) and higher finance cost (+8% QoQ).

Weaker performance from all three core businesses YoY. On YoY basis, Sapura fell into the red from a core net profit of RM5.4m in 1QFY18 in tandem with lower revenue (-40% YoY) dragged by weaker performances from all three core businesses. E&C earnings plunged 80% YoY marred by lower billing from existing projects while drilling segment also dipped into RM69m losses from RM21m profit as a consequence of lower number of rigs operated (5 rigs vs 7 rigs in 1QFY18).

Possible capital raising exercise? Orderbook and tenderbook remained flattish QoQ at RM16.7b and USD13b respectively. Meanwhile, we understand that the company is looking to strengthen its financial position with net gearing at 1.6x as of 1QFY19 via potential listing of E&P arm and possible capital raising exercise. Both proposals are still at evaluation stage with no details given.

Signing of PSC in Mexico. Separately, Sapura Energy announced the signing of PSC for Block 30, Surest Basin, Gulf of Mexico together with its JV consortium partners, Deutsche Erdoel Mexico (DEA) and Premier Oil. Recall that Sapura Energy has 30% equity stake while DEA and Premier Oil hold the remaining 40% and 30%, respectively. We expect no major spending in the near term with seismic study to be carried out in FY20 and drilling locations to be identified in FY21.

Turnaround in FY20. Following the transfer of coverage, we expect Sapura to widen its core losses by 7% to RM269.8m in FY19 dragged by lower E&C billings and weaker drilling segment. Subsequently, we project the company to turnaround and register RM16.0m and RM254.4m profit in FY20 and FY21, respectively underpinned by higher contract win and maiden contribution from SK408 development (Gorek, Bakong and Larak) which is slated to hit 1st gas in FY20-21.

Maintain HOLD, TP lowered to RM0.62. Maintain HOLD rating with lower TP of RM0.62 (from RM0.66) following our earnings forecast adjustment pegging to FY20 P/BV ratio of 0.4x as positive drivers such as stronger contract flow and potential listing of E&P arm would be overshadowed by near term earnings weakness and volatility in oil prices.

Source: Hong Leong Investment Bank Research - 2 Jul 2018