SAPE’s 4Q18 results continued to see challenges as E&C fell into losses and drilling remain loss-making on low rig utilisation. Management guided that the former will likely see a quicker recovery as compared to the drilling division. Meanwhile, we expect the E&P division to support the business as a result of higher volumes and price. We reiterate our SELL call for now as we believe the outlook will likely remain challenging for a couple more quarters before E&C work activities pick up pace. Maintain TP at RM0.40.

FY18 Revenue in Line, Losses Lower Than Expected

4Q18 headline losses came in at RM2.3bn. After excluding the RM2.1bn PPE impairments (mostly on drilling rigs), RM123m unrealized forex loss and RM4m disposal gain, core losses narrowed to RM34m. This brought FY18 losses to RM253m, less than our full-year net loss estimate of RM368m. Full year revenue of RM5.9bn was in line with our forecasts; however deviation came from the better-than-expected drilling margins.

E&C and Drilling Suffers, But Supported by E&P

All divisions continued to post yoy declines with E&C revenue down 13%, drilling and E&P revenue falling by 43% and 24%, respectively. E&C PBT declined 45%, with drilling falling into losses while supported by E&P division, which PBT was relatively unchanged. Associate/JV contributions fell 40% yoy in FY18 mainly due to winding up cost of SapuraAcergy and lower Brazil PLSV profits.

Letting the Next Few Quarters Sink In…

E&C activities were lower qoq due to seasonal factors, resulting in losses. Brazil pipe laying support vessels (PLSVs) continued to operate with high 98.6% utilisation. There were no changes in drilling rig utilisation qoq with 5 out of 15 rigs operational in 4QFY18. Management guided for utilisation rate to be similar in FY19E at 33%. Total volume lifted in FY18 declined 17% to 3.5m barrels from 4.2m barrels. While orderbook is higher at RM16.6bn, impact on earnings may likely be felt later on when E&C activities pick up. Net gearing increased from 1.26x to 1.56x qoq as a result of the impairment exercise.

…until Then, Maintain Our Contrarian SELL Call

We Leave Our FY19-20E EPS Forecasts Unchanged. We Maintain Our SELL

rating with an unchanged TP of RM0.40 based on 0.6x P/NTA. Key upside risks include a recovery in contract wins, E&C activities and rigs utilization.

Source: Affin Hwang Research - 29 Mar 2018