Sapura Energy (SAPE) 1HFY19 core losses missed expectation as both E&C and drilling segments reported weaker-than-expected margins, partly offset by better Energy earnings on higher oil prices. This led us to cut our FY19 losses, but raised FY20-21E earnings as we impute in the interest savings from the proposed rights issue. Maintain SELL call with an unchanged target price at RM0.32 which has taken into account the changes earlier.

E&C Profit Fell on Lower Margins Scope Work

E&C revenue increased 17.1% qoq in 2QFY19 attributed to higher engineering and procurement recognition, partly offset by lower vessel utilisation (fell from 50% in 1QFY19 to 33%). E&C returned into losses as margins contracted by 6ppts qoq. This will likely persist for several more quarters before construction work commences, which garner a higher margin. SAPE’s yard utilisation was relatively low at 10%, although likely to pick up towards 4QCY18 following Pegaga’s CPP first steel cut.

Recovering Drilling Segment Outlook

2QFY19 drilling losses narrowed by 15% in tandem with the higher revenue which rose 38% qoq underpinned by a higher number of operating rigs (5.8 rigs as compared to 4.4 rigs in 1QFY19). EBITDA margin however declined by 7ppts qoq. Drilling segment losses are expected to narrow in the near term as Sapura Berani commences contract in 3QCY18. Management has guided that prospects are improving with 10-12 of its rigs set to be tendered out, albeit timing is uncertain.

Energy to Continue Benefiting From Higher Oil Price

SAPE benefited from improving global oil price as it realised a higher lifting price at US$77/bbl as compared to US$70/bbl in 1QFY19. This led to earnings increasing by 2-fold from RM9m to RM28m. Lifting volume was relatively unchanged at 1.12mbbl vs. 1.08mbbl previously.

Orderbook and Prospect

The YTD win of RM5.3bn has lifted current order book size to RM16.9bn. This current size would be able to sustain SAPE’s revenue at RM4.3bn/RM4.6bn in FY19-20E, inclusive of the Brazilian PLSV contract which is recognised under associate and JV line. Bids and prospects stood at US$7.4bn, with Middle East and Africa being a big market to exploit.

Source: Affin Hwang Research - 1 Oct 2018