Sapura has secured three contract wins (2 E&C and 1 drilling) with a combined value of RM611m. The job wins were within our expectations. Hence, we made no changes to our earnings forecasts. All in, maintain HOLD rating on the stock with unchanged TP of RM0.12 pegging to unchanged 0.25x FY20 P/B. We believe that Sapura needs to display a more consistent earnings trend for us to warrant a rerating on the stock.

NEWSBREAK

Sapura Energy has announced three contract wins: (i) EPSCI and pre-commissioning of pipelines in Qatar by Total E&P, contract scope of work comprises EPSCI and precommissioning of 2 Nos 16 inch pipes lined with corrosion resistant alloy for the AlKhalig field, (ii) EPCIC and transportation for additional Andala’s pipeline project phase 4 by Carigali-PTTEPI operating company; contract scope of work comprises of EPCIC and transportation of host tie-in and brownfield modification at Jengka-A well head platform, Andalas-B wellhead platform, and Muda central processing platforms and (iii) award of contract for Tender Rig Sapura Berani by Total E&P Congo for 3 months, commencing in 4QFY21. The three contracts secured are worth an estimated RM611m.

HLIB’s VIEW

Contract wins does not guarantee positive earnings impact. While we view the contract win/extension as a positive development for Sapura, we believe that there are still ample risk with regards to the execution of these contracts due to the current O&G climate. Sapura has experienced a negative EBIT margin for both its E&C and drilling segments for the most part of FY20 and we believe that border restrictions as a result of the resurgence in Covid-19 cases would potentially cause logistical issues with regards to the delivery of its E&C projects. However, Sapura has recorded an improvement in its 2QFY21 results due to successful cost cutting measures bearing fruits and we opine that Sapura would have to show more consistent and promising results in order for us to warrant a re-rating on our call.

Net gearing risk. We believe that Sapura’s net gearing risk remains high at this point in time and the Company needs to refinance its debt soon. As of 2QFY21, its net gearing stood at 1.04x with a cash balance of RM732m and a short-term debt of RM3.3bn (c.50% unsecured). We believe that its earnings would be required to grow substantially for it to be able meet its debt obligations.

Forecast. We make no changes to our forecast as the contract wins were within our expectations.

Maintain HOLD, TP: RM0.12. We maintain our HOLD call with an unchanged TP of RM0.12 based on 0.25x FY20 BVPS (below -1SD from 5-year mean P/B) as we remain cautious on its balance sheet and gearing despite its contract wins. We believe that Sapura would need to display more consistent earnings and it also needs to improve on its balance sheet position for us to upgrade our call on the stock.

Source: Hong Leong Investment Bank Research - 17 Nov 2020