Sapura recorded a 2QFY21 core profit of RM23.0m (1QFY21: -RM11.5m, 2QFY20: -RM113.1m) bringing 1HFY21 core profit to RM11.5m (1HFY20: -RM316.3m), which was above ours’ (FY21f: -RM271.8m) and consensus’ (FY21f: -RM157.1m) net loss forecast for FY21. The better than expected results were mainly attributable to higher E&C margins from cost-cutting measures implemented in the current quarter under review and lower net interest cost. While Sapura has successfully lowered its operational cost, its weak balance sheet remains a key cause of concern. We upgrade our FY21-22F net loss forecast from -RM271.8m/- RM157.1m to a net profit of RM33.4m/RM83.1m, upgrading to a HOLD call with revised TP of RM0.12, based on 0.25x FY20 P/B (>-0.8SD below 5 year mean) FY20 P/B.

Above expectations due to successful cost cutting measures. 2QFY21 core profit of RM23.0m (1QFY21: -RM11.5m, 2QFY20: -RM113.1m) brought 1HFY21 core profit to RM11.5m (1HFY20: -RM316.3m), was above ours’ (FY21f: -RM271.8m) and consensus’ (FY21f: -RM157.1m) net loss forecast for FY21. We arrived at our core earnings after subtracting its tax-adjusted forex gain amounting to RM0.6m. No dividends were declared, none expected for the year. The positive results surprise were attributable to better operating margins in 2QFY20 due to its optimisation programme and lower interest cost due to lower interest rates globally.

QoQ. Sapura recorded a core net profit of RM23.0m, which was up from -RM11.5m due to successful cost optimisation measures in place. However, the stronger QoQ performance were partially offset by deferred tax expenses recorded during the quarter for its E&P division and weaker drilling performance.

YoY. Sapura recorded an increase of RM136.1m in its core profit to RM23.0m from a core loss of -RM113.1m in 2QFY20 due to successful cost cutting measures and lower variable work orders YoY, partially offset by weaker E&P division performance due to the deferred tax expenses realised during the quarter.

YTD. Core profit stood at RM11.5m (1HFY20: -RM316.3m) primarily due to cost cutting measures implemented to date with an expected savings of c.RM450m.

Outlook. As at 2QFY21, Sapura’s orderbook stands at RM13.3bn and its tenderbook currently stands at c.RM29.4m. 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. However, Sapura has managed to optimise its cost through (i) productivity improvement and capex optimisation, (ii) deep diving into commercial opportunities within existing contracts and (iii) salary reductions. The optimisation initiatives implemented are expected to result in cost savings amounting to RM1.1bn over the next 12 months. While its balance sheet is still weak at this juncture, we believe that the Company would be able to refinance its short-term borrowings, extending its tenure by at least 5 years, in view of its better operational performance.

Forecast. We revise our FY21-22 net loss projections from -RM271.8m/-RM157.1m to a core profit of RM33.4m/RM83.1m in view of the successful cost optimisation measures carried out thus far and lower net interest cost assumptions.

Upgrade to HOLD at TP of RM0.12. We upgrade to a HOLD call from a Sell previously with a TP of RM0.12 based on 0.25x FY20 BVPS (below -0.8SD from 5-year mean P/B). We believe that Sapura would need to further improve on its operating margins for us to warrant a Buy call as its balance sheet is still weak.

Source: Hong Leong Investment Bank Research - 21 Sept 2020