Sapura Recorded a 3QFY21 Core Loss of -RM15.8m (2QFY21: RM23.0m, 3QFY20: - RM121.9m) Bringing 9MFY21 Core Loss to -RM4.3m (9MFY20: -RM438.2m), Which Was Below Ours’ (FY21f: RM33.4m) But Above Consensus’ (FY21f: -RM153.0m) Net Loss Forecast for FY21. The Weaker Than Expected Results Were Mainly Attributable to Higher Than Expected Operational Cost During the Quarter (+34% QoQ). Despite Higher Overall Operational Cost, Its Associate SapuraOMV Contribution Stood at RM80.9m (2QFY20: -RM19.5m, YoY: +34%). We Downgrade Our FY21-23F Net Profit Forecast by 98/12/6% to Factor in the Higher Than Expected Operational Costs Going Forward. Maintain HOLD With TP of RM0.12, Based on 0.25x FY21 P/B as We Believe That Its Financial Performance Is Likely to Improve Going Forward Despite Its Shortcomings This Quarter. 9MFY20 Core Profit Was Derived After Adjusting for Tax-adjusted Net Forex and Disposal (SapuraOMV) Gain of RM21.5m and RM37.5m.

Below expectations due to higher operating costs. 3QFY21 core loss of -RM15.8m (2QFY21: RM23.0m, 3QFY20: - RM121.9m) and 9MFY21 core loss of -RM4.3m (9MFY20: -RM438.2m), was below ours’ (FY21f: RM33.4m) but above consensus’ (FY21f: -RM153.0m) net loss forecast for FY21. We arrived at our core earnings after subtracting its tax-adjusted forex and disposal gain amounting to RM21.5m and RM37.5m respectively. No dividends were declared, none expected for the year. The weaker than expected results were attributable to higher operating costs recorded during the quarter despite its cost optimisation measures.

QoQ. Sapura recorded a core net loss of -RM15.8m, which was down from RM23.0m due to higher operational costs (+34%) despite revenue only rising by 9%. However, the stronger QoQ performance were partially offset by stronger associate performance.

YoY. Sapura’s core loss of -RM15.8m was lower by RM106.1m due to better showing across all divisions due to cost cutting measures implemented in FY21.

YTD. Core loss of -RM4.3m (9MFY20: -RM438.2m) was primarily due to cost cutting measures implemented to date. Sapura has realised RM240m of its targeted cost saving initiatives so far.

Outlook. As at 3QFY21, Sapura’s orderbook stands at RM12.5bn and its tenderbook currently stands at c.RM38.8bn (>50% gas development projects). Sapura will continue to implement its cost savings initiatives through the implementation of various cost saving initiatives. The optimisation initiatives implemented are expected to result in cost savings amounting to RM1.1bn over the next 12 months. RM600m of its targeted cost saving initiatives have been implemented thus far, of which RM240m has already been realised. Despite the implementation of its cost saving initiatives, its operational cost was significantly higher QoQ, which signifies that the O&G market is still suffering at this point in time. However, we believe that the distribution of a successful vaccine is expected to lift the O&G market up and potentially result in more contract wins for Sapura. We also believe that the Company would be able to refinance its short-term borrowings, extending its tenure by at least 5 years and we view that the refinancing exercises will be done by 1QCY21.

Forecast. We downgrade our FY21-23F net profit forecast by 98/12/6% to factor in higher operating costs despite cost optimisation measures in place.

Maintain HOLD at TP of RM0.12. We maintain our HOLD call with a TP of RM0.12 based on 0.25x FY21 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 - 28 Dec 2020