9MFY20 revenue accelerated (+58% YoY) as E&C activities picks up steam. Despite this, earnings was underwhelming as Sapura navigates through the early stage of the S-curve and jobs awarded during the low activity period of yesteryears. This was further compounded by weaker JV & associates contribution (-24% YoY). We cut our FY20 projection to -RM521.1m from - RM341.1m, factoring in lower margins from the E&C segment for FY20; however we are keeping our FY21-22 numbers intact. Maintain HOLD with lower TP of RM0.28 (from RM0.31) pegged to lower 0.40x FY20 P/B.

Below expectations. 3QFY20 core net loss of -RM121.9m (2QFY20: -RM113.1m, 3QFY19: -RM461.3) brought 9MFY20 core net loss of -RM438.2m (from 9MFY19 core net loss of -RM461.3m). The results came below expectations as compared to ours/consensus FY20 core loss estimates of -RM341.1m/-RM219.5m respectively. The negative deviation was largely due to thinner margins from the E&C segment as it navigates through the starting tail of the S-curve, as well as a reflection of projects secured during the low activity levels in the market. This was compounded by weaker JV & associates contribution (-24% YoY).

QoQ. Sapura’s core net losses widened marginally by -RM8.8m to -RM121.9m (from - RM113.1m) in 2QFY20. The slightly weaker performance was largely due to wider losses from the drilling segment (PBT: -RM48m vs. -RM36m QoQ) and lower contributions from E&C (PBT: RM16m vs. RM27m QoQ).

YoY. Sapura narrowed its core losses from -RM461.3m in 3QFY19 to -RM438.2m in 3QFY20 largely due to (i) positive tax (largely from its foreign operations) of RM11.3m vs -RM23.3m YoY and (iii) lower finance costs -43% YoY on the back of its balance sheet restructuring.

YTD. Revenue accelerated +58% YoY to RM5.3bn due to work orders seeing an uptick (E&C). Core losses narrowed, decreasing 5% on higher revenues and lower finance costs (-29% YoY).

Outlook. Sapura announced contract wins totalling RM615m (YTD win to RM3.7bn). Order book stands at RM15.1bn (vs. RM16.3bn in 2Q20), with RM2.7bn, RM5.6bn and RM6.8bn to be recognised in FY20-21. Orderbook expansion can be expected on the back of a USD8.1bn tender book.

Forecast. We revise FY20 projections to -RM521.1m from -RM341.1m as we factor in lower margins from the E&C segment for FY20. We are keeping our FY21-22 numbers as we remain hopeful that Sapura will turn the corner and accelerate out the S-bend sooner than later.

Maintain HOLD and TP: RM0.28. Maintain our HOLD call with a lower TP of RM0.28 (from RM0.31) pegging to 0.40x (-0.75SD below 5 year mean) FY20 P/B (from 0.45x as we widen the discount to better reflect Sapura navigating through thin margin waters). Nonetheless, we are of the opinion that Sapura should see better sequential results as losses from the drilling segment continue to narrow and interest savings after paring down its debt. FY21 growth will be largely from SK408 gas field’s maiden contribution.

Source: Hong Leong Investment Bank Research - 6 Dec 2019