Sapura Energy’s 1HFY19 core net losses of RM309m came below expectations on weaker-than-expected E&C contribution and higher-than-expected tax expense. Order book stood at RM16.9bn while tender book remained at USD7.4bn with additional USD10.2bn prospects to be pursued. The RM4.0bn recapitalisation exercise and on-going and monetisation of its 50% stake in E&P arm will enable Sapura to lower its gearing level to bid for bigger projects. Post results, we widen FY19 losses by 83% and cut FY20 earnings by 18%. All in, maintain HOLD rating on the stock with unchanged ex-rights TP of RM0.34 as stronger contract flow would be offset by near term earnings weakness.

Below expectations. 1HFY19 core net loss of RM308.8m came below expectations at 117%/184% of ours/consensus FY19 core loss projections. The disappointing results were largely due to weaker-than-expected E&C contribution and higher-than expected tax expense. No dividend was declared, as expected.

QoQ. Sequentially, Sapura narrowed its core net losses by 14% QoQ to RM143.1m in 2QFY19 after stripping off RM17m unrealised forex gain thanks to stronger energy segment (+2.1x; stronger average lift oil prices) and narrowed losses for drilling segment as a result of higher utilisation. This was offset by weaker E&C segment which dipped into RM20.5m losses from RM36.5m profit despite segmental revenue increasing by 17% QoQ due to poorer margin work being recognised amidst low E&C asset utilisation (33% in 2QFY19 vs 50% in 1QFY19). Management is expecting E&C segment to pick up with margin recovery in the next 6 months as these assets are being mobilised for new jobs.

YoY. Sapura fell into the red from a core net profit of RM36.9m in 2QFY18 in tandem with lower revenue (-24% YoY) dragged by weaker performances for E&C segment (RM20.5m losses vs RM126.7m in 2QFY18) as a consequence of lower project billings and margins.

YTD: Sapura also slipped into RM308.8m core losses in 1HFY19 from RM42.4m profit in 1HFY18 dragged by weaker performances from all three core businesses. Note that energy segment recorded weaker earnings (-22%;) marred by higher depreciation charge for B15 gas field and lower oil production despite being lifted by higher average price coupled with maiden contribution from B15 gas field.

Next is drilling? Order book stood at RM16.9bn including YTD win of RM5.3bn while tender book remained at c.USD7.4bn with additional USD10.2bn prospects to be pursued. Meanwhile, the RM4.0bn recapitalisation exercise will enable Sapura to lower its gearing level to bid for bigger projects and monetisation of its 50% stake in E&P arm is still on-going pending further details. The company is actively talking to other international drillers for strategic partnership but disclosure is limited at this juncture.

Forecast. We widen our FY19 core losses projections by 83% to RM482.6m and cut FY20 earnings by 18% to RM142.5m on lower E&C margins and higher tax expense.

Maintain HOLD, ex-rights TP: RM0.34. We maintain our ex-rights TP at RM0.34 pegging to unchanged 0.5x FY20 PBV. Note that the successful disposal of 50% stake in its E&P arm would possibly increase our ex-right TP by another 13%. Maintain HOLD rating on Sapura as stronger contract flow would be offset by near term earnings weakness.

Source: Hong Leong Investment Bank Research - 1 Oct 2018