Following our recent discussion with Sapura Energy (SAPE), we gathered that i) business is expected to remain challenging in FY18, ii) timing of order book replenishment is rather uncertain, iii) drilling rig utilisation rates are expected to recover only from FY19E onwards with daily charter rates (DCR) remaining subdued, and iv) Brazil operation remains robust with high vessel utilisation. Ahead of the upcoming 2QFY18 results this month, we cut our FY18-20E earnings forecasts by 34%-64%. We maintain a HOLD rating but lower our target price to RM1.35.

Engineering and Construction (E&C) Sees Challenging Margins

SAPE has secured RM1.3bn worth of new contracts ytd, lifting total order book to RM17bn. Out of which, SAPE would recognize RM4.9bn in FY18E, RM3.4bn in FY19E and RM8.7bn from FY20E onwards. Despite the current record high bid book of US$8.2bn, we believe that visibility will continue to be murky in terms of order book replenishment for the E&C segment.

DCR Bottomed, Rig Utilisation Improving Only From FY19E

The group currently has five rigs operating while ten are stacked, as of Sept 2017, putting total fleet utilisation at 33%, which has yet to see any improvement since June 2017. All the five (T-9, T-12, T-18, T-19 and Pelaut) working rigs are currently on long-term contracts, with contract expiries around CY19. DCRs for the tender and semi-tender rigs have bottomed in CY16 but showing no signs of improvement, ranging around US$70,000–90,000/day and US$120,000–150,000/day, respectively.

Energy – FY19E Production Rate to be Flat Yoy

The company has guided production volume averaging c.3.6m in FY18, representing a 12% yoy decline. Moving into FY19, production level is expected to stay flat, supported by SK310 gas supply agreement, which we believe will help offset the existing oil field natural production decline. Longterm re-rating catalyst will depend on the monetisation of SK408 field (SAPE owns 40% stake) which has proven to have a bigger reserve as compared to the current SK310 field.

Maintain HOLD With Lower Target Price

We believe the current valuation has largely reflected the fundamentals of the company. We maintain our HOLD call but lower our SOTP-derived target price to RM1.35 (from RM1.70) post our earnings cuts.

Source: Affin Hwang Research - 7 Sept 2017