12MFY20 revenue improved (+41% YoY) as E&C billings accelerated. 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 (-55% YoY). We revise FY21-22 projections to -RM410.7m and -RM344.9m, factoring in lower margins from the E&C segment. Downgrade to HOLD with lower TP of RM0.09 (from RM0.14) pegging to 0.20x(>-1SD below 5 year mean) FY20 P/B.

Below expectations. 4QFY20 core net loss of -RM963.2m (3QFY20: -RM121.9m, 4QFY19: -RM558.0m) brought full year FY20 core net loss of -RM1,401.5m (from FY19 core net loss of -RM1,019.3m). The results came below expectations as compared to ours/consensus FY20 core loss estimates of -RM521.1m/-RM502.0m respectively. In deriving our core earnings we have adjusted for an impairment totalling RM3.28bn of which RM3.04bn is an impairment on goodwill (Drilling segment: RM1.98bn; E&C segment: RM1.06bn) and RM240m being an impairment on rigs and vessels. The negative deviation was largely due to thinner margins from the E&C segment a reflection of projects secured during the low activity levels in the market. This was compounded by weaker JV & associates contribution (-55% YoY).

QoQ. Sapura’s core net losses widened to -RM963.2m (from -RM121.9m) in 4QFY20. The weaker performance was largely due to wider losses from E&C (PBT: -RM755m vs. RM16m QoQ). Some saving grace at the Drilling segment with a PBT of RM2m vs RM48m.

YoY. Sapura’s core losses widened from -RM558.0m in 4QFY19 to -RM963.2m in 4QFY20 largely due to (i) higher losses from its E&C segment arising from a mismatch of project margins and input costs partially offset by narrowing losses at the drilling segment on improved rig utilisation.

YTD. Revenue accelerated +41% YoY to RM6.4bn due to work orders seeing an uptick (E&C). Core losses widened on lower project margins and lower share of profit from JV’s and associates.

Outlook. As at FY20 Sapura’s order book stands at RM13.5bn. We understand that there could potentially be a deferment of revenue to the tune of RM600-RM800m into FY22 as a result of execution delays due to the prevailing business environment. Orderbook expansion can be expected on the back of a USD5.6bn tender book and further prospects of USD10bn. We understand that the bulk of the tender books are mostly from gas projects. In the near term, we understand that management are working hard to preserve cash whilst it works towards refinancing its borrowings to the tune of RM10bn, which should come to a satisfactory conclusion by years end. Management aspires to save c.RM500m per annum via man power optimization, reduction of opex, better procurement and measured capex spending moving forward.

Forecast. We revise FY21-22 projections to -RM410.7m and -RM344.9m from a position of profit, as we factor in lower margins from the E&C segment moving forward.

Downgrade to HOLD and TP: RM0.09. Post earnings revision we downgrade the stock to HOLD call with a lower TP of RM0.09 (from RM0.14) pegging to 0.20x (below -1SD from 5-year mean) FY20 P/B. We widen the discount to better reflect Sapura navigating through thin margin waters amidst a prolonged recovery and troubling business environment.

Source: Hong Leong Investment Bank Research - 30 Apr 2020