Likely Better 2H on Tax Rather Than Operations

Sapura Energy’s (SAPE) 2Q18 core net profit improved qoq due to a more favourable tax impact compared to 1Q18, and was in line with our expectations. Cumulatively, the yoy decline was dragged down by weaker drilling and exploration & production (E&P) divisions. Earnings is expected to further improve in 2H18 on a lower effective tax rate. Operationally, earnings are still volatile as reflected by the drilling division loss before tax of RM85m in 2Q18, from a profit in 1Q18, as a result of lower rig utilisation. Meanwhile, the engineering and construction (E&C) division will likely see challenges in its margins despite revenue improvement, as seen in 2Q18. We maintain our target price at RM1.35 but downgrade the stock to a SELL because of its lofty valuation.

Better 2H Expected on Normalized Tax

Excluding the RM8m unrealized forex loss, 2Q18 core net profit came to RM36.9m, which brought 1H18 core profit to RM42.9m, accounting for 27% of our full-year forecast. Despite a 4.9% qoq improvement in E&C revenue, PBT fell 30.2% due to lower margin works being executed. Meanwhile, the E&P division lifted a similar volume in 2Q18 at 0.8mmboe vs. 1Q18, but at a lower realized price of US$50/bbl (1Q18: US$52/bbl), which led to revenue and PBT declining by 16.6% and 9%, respectively. Associate contributions fell 33% qoq due to larger losses suffered in SapuraAcergy.

Drilling and Order Book Activity Still Weak

Only 6 rigs were in operation in 2Q18 vs. 7 rigs in 1Q18, which resulted in revenue declining by 27.7% and earnings falling into the red. T-12 was partially working in 2Q18, but is now stacked. Management expects to close the financial year with 5 working rigs (refer to Fig 3) on the back of lackluster tender activities. The latest order book stood at RM15.1bn vs. RM17bn in 1Q18. Daily charter rates continue to stay stagnant qoq.

Downgrade to SELL; Unchanged RM1.35 Target Price

We are keeping our earnings forecasts and 12-month SOP-based target price of RM1.35. However, we downgrade the stock to SELL from Hold. We believe that the recent share price performance is not reflective of its current fundamentals (trading at a forward 60x FY18 PE), but rather of sentiment. Key upside risks include a recovery in contract wins and higherthan-expected drilling rig utilisation.

Source: Affin Hwang Research - 28 Sept 2017