Sapura recorded 1QFY21 core loss of -RM11.5m (-99% QoQ, -94% YoY) which was above ours’ and consensus’ forecast. The improvement in results were mainly attributable to higher E&C margins from cost-cutting measures implemented in the current quarter under review and higher net lifting (2.4MMboe) from its SK408 field. Despite improved results, we still believe Sapura would end the year in the red as we expect a contraction of margins to happen in view of the volatile and uncertain oil market. We also believe that its weak interest coverage ratio of 1.2x and imminent required principal repayments of its short-term debt are major causes of concern. Given the positive results surprise, we reduce FY21-22F net loss forecast by 31/55% but maintain our HOLD call with an unchanged TP of RM0.09, based on 0.2x FY20 P/B (>-1SD below 5 year mean) FY20 P/B.

Above expectations but expect losses to widen in subsequent quarters. 1QFY21 core net loss of -RM11.5m was above ours’ and consensus’ expectations constituting 3/2% of our/consensus’ core net loss forecast. We arrived at our core earnings after subtracting its tax-adjusted forex gain amounting to RM25.4m. We believe that while the E&C division has recorded improved margins in 1QFY21, more deferrals of contracts could come in the following quarters, which is why we still believe that Sapura would still be in the red. However, 1QFY21 results has displayed some much needed improvements for the E&C division. Production from its E&P division has also improved due to increased net lifting, primarily from its SK408 field. No dividend was declared.

QoQ. Sapura’s core net loss narrowed to -RM11.5m from -RM963.2m previously. The better QoQ performance was mainly attributable to (i) higher revenue from the E&C division, (ii) lower operating expenses as a result of cost cutting measures and (iii) higher contribution from its E&P segment due to higher net lifting of 2.4MMboe (+71% QoQ) from the SK408 field.

YoY. Sapura’s core losses narrowed to -RM11.5m from -RM203.2m previously despite a 17% decrease in revenue due to (i) lower operating expenses, which declined by 17% YoY and (ii) narrowed losses from the drilling segment due to higher YoY utilization.

Outlook. As at 1QFY21, Sapura’s orderbook stands at RM14.0bn and its tenderbook currently stands at c.RM27.2m. In view of the current uncertainty with regards to the global economy and the oil market, we foresee minimal contract wins for the remainder of the year as most oil majors are expected to delay or defer major rollout of contract awards. Going forward, Sapura will target operational cost savings amounting to RM650m through (i) salary cut and rightsizing exercisers, (ii) vessel, yard, rigs and overhead costs rationalization and (iii) procurement savings. Sapura is also targeting to reduce its capex by RM150m. Sapura is also in the midst of negotiating with its lenders for an additional RM1.5bn in working capital to fund its recovery. It is also in the middle of refinancing negotiations with all its lenders to extend its maturity profile from up to 3 years currently to up to 10 years. We believe that it is extremely crucial for Sapura to refinance its short-term debt obligations as soon as possible as it does not have the funds to repay a big portion of its short-term debt, which would be due very soon. Sapura’s interest cover as of 1QFY21 stood at a very unhealthy 1.2x despite its improved results and lower effective interest cost on debt YoY. However, we believe that any subsequent weakness in earnings would be mitigated by contributions from its E&P division, which is expected to see net lifting volumes for its SK408 field increasing by more than 30% QoQ.

Forecast. We revise our FY21-22 net loss projections down from -RM410.7m/- RM344.9m to -RM270.7m/-RM155.9m in view of the successful cost optimisation measures carried out in 1QFY21.

Maintain HOLD at TP of RM0.09. We maintain our HOLD call with an unchanged TP of RM0.09 based on 0.2x FY20 BVPS (below -1SD from 5-year mean P/B) despite its improved 1QFY21 results as we remain cautious on its balance sheet and gearing. Net gearing of 1.05x (4QFY19: 1.03x) has actually worsened in the current quarter, despite core losses narrowing. We do not foresee Sapura ending the year in the black due to the volatility and uncertainty of the current oil market in spite of its improved 1QFY21 results. We expect E&C margins to weaken in the following quarters but we expect the losses from the E&C segment to be mitigated by stronger E&P performance as SK408’s production picks up. We believe that Sapura is fairly valued at this juncture and would require more consistent operational performance to warrant a re-rating.

Source: Hong Leong Investment Bank Research - 30 Jun 2020