Higher Tax the Culprit

Sapura Energy (SAPE) reported low 1QFY18 core net profit of RM5.4m, which missed both our and the street’s full-year estimates. However, if we analyse the respective P&L items at the revenue, EBITDA and PBT levels, 1QFY18 results achieved 24%, 20% and 21% of our full-year forecasts. Deviation from our results came entirely from the higher-than-expected tax impact. We maintain our HOLD rating and target price of RM1.70, based on an SOTP valuation.

1QFY18 Results Hit by High Tax

SAPE booked headline net profit of RM27.5m (+116% qoq, -75.1% yoy). Adjusting for the RM16.5m unrealised forex gain and RM5.6m disposal gain on SKD Teknik Berkat, SAPE reported core net profit of RM5.4m.

QoQ Comparison

SAPE’s 1Q core net profit fell 90.2% qoq, largely due to a higher tax payable as a result of a higher effective tax rate, coupled with lower associate and JV profit, which declined 22.3% qoq. The qoq drop was mainly due to the lower SapuraAcergy contribution, which declined from RM28m to RM18m. The Brazil PLSV operation continues to operate at a high utilisation rate at close to 100%, contributing around RM100m of profit per quarter. Revenue declined by 2.4% qoq, attributed to the lower drilling and energy segments, which fell 3% and 29% qoq. Volume lifted was slightly lower at 0.8mmboe vs 1.0mmboe in 4QFY17. However, the realized oil price was US$1/bbl higher in 1QFY18 at US$52/bbl, which helped to partially offset the negative impact.

Orderbook Update and Status of Drilling Rigs

After replenishing RM1.3bn of new contracts in 1QFY18, total outstanding orderbook was at RM17bn vs. RM16.7bn in 4QFY17. From our last check on Rigzone, 2 more rigs have been stacked (SKD T-10 and T-12), putting the total operational rig count at 5 rigs, while 10 rigs are currently stacked. 1QFY18 saw 7 rigs in operation vs. 8 rigs in 4QFY17. On the results call, management indicated that daily charter rates for tender and semi tender rigs continue to see pressure. We assume average drilling rigs utilisation rates of 48% in FY18, 57% in FY19 and 64% in FY20.

Maintain HOLD and RM1.70 Target Price

We maintain our FY18-20 earnings forecasts for SAPE. Our FY18 earnings forecast is significantly higher than the street, as we believe the strong associate contribution from the Brazil operation will continue to support earnings and partially offset the weaker E&C and drilling businesses. Maintain HOLD and SOTP-based 12M target price of RM1.70.

Source: Affin Hwang Research - 20 Jun 2017