Sapura’s 9MFY19 core net loss of RM386.9m came within our expectations but below consensus expectations at 80%/174% of ours/consensus FY19 core loss projections. Order book improved 10% QoQ to RM18.5bn while tender book also increased by 19% QoQ to USD8.8bn with additional USD14.3bn prospects to be pursued. The RM4bn recapitalisation exercise and on-going 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 increase FY20-21 earnings by 3-6% on higher replenishments. All in, maintain BUY rating on the stock with unchanged ex rights TP of RM0.41 pegged to unchanged 0.5x FY20 P/B.

Within our expectations. 9MFY19 core net loss of RM386.9m came within our expectations but below consensus expectations at 80%/174% of ours/consensus FY19 core loss projections. No dividend was declared, as expected.

QoQ. Sequentially, Sapura narrowed its core net losses by 45% QoQ to RM78.1m in 3QFY19 after stripping off RM47m unrealised forex gain. The better performance was largely underpinned by turnaround of E&C segment with higher project billings, stronger energy segment (+33%; stronger average lifting oil prices) and narrowed losses for drilling segment as a result of higher utilisation.

YoY. Sapura also narrowed its core losses by 70% in tandem with stronger revenue (+17% YoY) thanks to better performance from all three segments.

YTD: Sapura’s core losses widened by 78% to RM386.9m in 9MFY19 dragged by weaker performances for E&C segment (-83%; lower project billings and margins). It was cushioned by narrowing losses for drilling segment due to lower depreciation despite drilling revenue increasing 25% YoY coupled with stronger energy segment (+33%; higher liftings and average prices).

Outlook Order book increased by 10% QoQ to RM18.6bn including YTD wins of RM8.5bn. Note that Sapura also announced the award of the RM3bn EPCC work (RM1.45bn net to Sapura) for offshore process platform project for development of KG-DWN-98/2 NELP Block to 48%-owned consortium with Afcons Infrastructure Limited from ONGC. Meanwhile, tender book improved by 19% QoQ to c.USD8.8bn with additional USD14.3bn prospects to be pursued. We were guided that tenders for the drilling segment has picked up significantly and therefore, drilling utilisation is expected to improve next year. The company is actively talking to other international drillers for strategic partnership but disclosure is limited at this juncture.

Forecast. We make no changes to our FY18 core losses projections but increase our FY20-21 earnings by 3-6% after accounting higher contribution from E&C with higher replenishments.

Maintain BUY, ex-rights TP: RM0.41. We reiterate our BUY rating with unchanged ex-rights TP of RM0.41, pegging to unchanged 0.5x FY20 P/B. This is premised on strengthening of balance sheet post monetisation exercise of its E&P arm (net gearing lowered to 0.6x in FY20) eliminating near term financial risk. Additionally, improving contract flow and turnaround in FY20 will be additional positive catalysts to Sapura.

Source: Hong Leong Investment Bank Research - 7 Dec 2018