Sapura’s FY19 core net loss of RM945m came in wider than our FY19 loss projection due to weaker-than-expected E&C and drilling contribution. Declaration of 0.5sen/share special dividend was a pleasant surprise. Orderbook remained firm at RM17.2bn while tender book also increased significantly to USD11bn. Post results, we cut FY20 earnings by 37% with the anticipation of slower E&C contribution but increase FY21 earnings by 3%. All in, maintain BUY rating on the stock with higher TP of RM0.43 pegged to higher 0.6x FY20 P/B on lower uncertainty to its book value subsequent to its kitchen sinking activities in end-FY19.

Below expectations. FY19 core net loss of RM944.9m came below expectations at 196%/237% of ours/consensus FY19 core loss projections. In deriving core earnings, we have adjusted for unrealised forex gain of RM11m, RM2.66bn gain on disposal of 50% stake in its E&P arm and RM1.52bn impairment on its goodwill, drilling rigs and marine assets. The negative deviation was largely due to weaker-than-expected E&C and drilling contribution. Declaration of 0.5sen/share special dividend was a pleasant surprise.

QoQ. Sequentially, Sapura widened its core net losses by 6.2x QoQ to RM558.0m in 4QFY19 after stripping off RM85m unrealised forex loss, RM2.66bn gain on disposal of 50% stake in its E&P arm and RM1.52bn impairment on its goodwill, drilling rigs and marine assets. The weaker performance was largely dragged by higher operating cost, underperformance of E&C segment (higher provisions & weaker margins) and drilling division.

YoY. Sapura also widened its core losses by 16x from RM33.5m losses in 4QFY18 despite revenue surging by 65% (led by E&C) no thanks to poorer performance from all three segments as a result of margin compression.

YTD: Sapura’s core losses widened by 2.8x to RM944.9m in FY19 dragged by weaker performances for E&C segment and drilling segment. It was cushioned stronger energy segment (+3%; higher liftings and average prices).

Outlook Order book stood at RM17.2bn including YTD wins of RM9.3bn, of which RM6.9bn and RM4.0bn will be recognised in FY20-21 respectively. We might see further orderbook expansion on the back of robust USD11bn tenderbook whereby 56% of it is coming from the Middle East and Africa. Meanwhile, recovery of drilling segment is slower than expected with target of 8-11 rig utilisation by end FY20-21. Note that Sapura has completed the rights issue and strategic partnership with OMV for its E&P arm, lowering its net gearing to 0.64x as of end-FY19 from 1.56x a year ago.

Forecast. We cut our FY20 earnings but 37% to RM78.7m after accounting for weaker E&C contribution as we believe it will only pick up strongly in 2HFY20. However, FY21 earnings are adjusted upwards by 3% to RM303.7m subsequent to lower depreciation post impairment.

Maintain BUY, TP: RM0.43. Despite the results shortfall, we reiterate our BUY rating with slightly higher TP of RM0.43 (from RM0.41), pegging to higher 0.6x FY20 P/B (from 0.5x previously). This is premised on lower uncertainty to its book value subsequent to its kitchen sinking activities in end-FY19. We believe Sapura should be recording better sequential quarterly results and turnaround in the 2HFY20 due to pick up in E&C contribution, and interest savings after paring down its debt. FY21 growth should be largely coming from SK408 gas field’s maiden contribution.

Source: Hong Leong Investment Bank Research - 26 Mar 2019