Sapura’s 1QFY20 core net loss of RM203m came below expectations due to higher finance cost and weaker JV & associates contribution. We cut our FY20 projection to RM132.9m core losses from RM78.7m core profit and FY21 earnings by 7% on higher interest expenses and lower contribution from the PLSVs contribution. Having said that, we still believe Sapura should be recording better sequential quarterly results and turnaround in the 2HFY20 due to pick up in E&C and drilling contribution, as well as interest savings after paring down its debt. All in, maintain BUY rating on the stock with lower TP of RM0.35 (from RM0.43) pegged to lower 0.5x FY20 P/B.

Disappointing results. 1QFY20 core net loss of RM203.2m came below expectations as compared to ours/consensus FY20 core profit estimates of RM73.7m/RM130.0m respectively. In deriving core losses, we have adjusted for unrealised forex gain of RM65m, RM88m net settlement claim from previous acquisition and RM70m fair value ESOS charge. The negative deviation was largely due to higher-than-expected interest cost and weaker-than-expected JV & associates contribution.

QoQ. Sequentially, Sapura narrowed its core net losses by 64% QoQ in 1QFY20. The better performance was largely backed by better E&C segment as a result of higher project billings and margins as well as narrowed losses for drilling division with the help of lower depreciation post impairment exercise.

YoY. Sapura widened its core losses by 23% from RM165.7m losses in 1QFY19 largely due to lower earnings contribution from its E&P segment following its disposal of 50% stake to OMV which completed by end-FY19. This is partially offset by better contribution from E&C division and narrowed losses for drilling segment.

Outlook. Separately, Sapura announced several contract win with a combined value of RM1.0bn, which lifted its YTD win to RM2.3bn. Order book stood at RM17.3bn, of which RM5.9bn and RM4.8bn will be recognised in FY20-21 respectively. Further orderbook expansion can be expected on the back of robust USD7bn tenderbook whereby Middle East and Africa regions are taking up the biggest portion. Meanwhile, we expect gradual improvement in drilling segment with 7-8 rig utilisation by 2HFY20 (vs 1QFY20’s 5). Two PLSV contracts will end in July and September this year respectively and Sapura is currently considering redeployment or negotiating for an extension. Balance sheet wise, Sapura has also repaid its RM7.2bn borrowings and net gearing stood at 0.66x as of 1QFY20.

Forecast. We cut our FY20 projection to RM132.9m core losses from RM78.7m core profit and FY21 earnings by 7% on higher interest expenses and lower contribution from the PLSVs contribution. Meanwhile, FY22 earnings of RM376.2m (+33% YoY is introduced on the back of stronger contribution from all three core segments.

Maintain BUY, lower TP: RM0.35. Subsequent to the results shortfall, we reiterate our BUY rating with lower TP of RM0.35 (from RM0.43), pegging to lower 0.5x FY20 P/B (from 0.6x previously). Having said that, we still 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 - 28 Jun 2019