Sapura Energy (SAPE) 9MFY19 core losses missed ours and consensus’ expectations with the deviation coming from higher than expected tax charges. PBT is in line with our full year forecast at 77%. We expect the losses to further narrow sequentially in the upcoming 4QFY19 results. Maintain HOLD with an unchanged TP of RM0.35.

E&C Profit Rose in Tandem With Higher Activities

E&C revenue increased 23.1% qoq in 3QFY19 driven by a more robust work activity. As a result, E&C returned to the black from losses of RM20.9m in 2QFY19 to RM39.6m in 3QFY19.

Narrowing Drilling Segment Losses

The drilling segment saw an increase in the number of working rigs from 6 to 7 units qoq as SKD Berani commenced with its contract. We expect the narrowing losses trend to continue into 4QFY19 as seen in 3QFY19 when drilling division losses narrowed to RM11.7m qoq.

Energy Continues to Carry With Brightening Prospects

The energy segment benefited from the higher oil price in 3QFY19, with the segment recording a 30.1% increase qoq in revenue, driven by the higher lifting price of US$79/bbl (2QFY19 prices US$77/bbl) as volume maintained at 1.1mmbbl qoq. In tandem with the higher oil price, this translated into a PBT increased from RM27.8m to RM37.1m qoq.

Order Book and Prospect

SAPE and Afcons also announced a contract yesterday for the Offshore Process Platform project from ONGC to be completed by January 2021. This translates to RM1.47bn order book replenishment for SAPE based on its 48.3% stake in the JV company putting the YTD contract win to RM8.5bn. The recent EPCI Long-Term Agreement Programme between SAPE and Saudi Aramco would also be beneficial to the group’s long-term growth. Current outstanding order book stands at RM18.6bn.

Maintain HOLD With SOTP Based TP of RM0.35

We forecast a wider FY19 core loss as we impute in a higher effective tax rate (from 15% to 55%) but maintain FY20-FY21E forecast. Maintain our HOLD call with an unchanged SOTP based target price of RM0.35.

Key upside risks include (i) higher contract wins than we expected, (ii) better rig utilisation rates, (iii) further strengthening in global oil prices. Key downside risks include (i) decrease in global oil prices, (ii) delay in existing work orders, (iii) weaker drilling rigs utilization

Source: Affin Hwang Research - 7 Dec 2018