SAPE’s 4QFY19 results missed expectations, due mainly to a weak engineering and construction (E&C) performance, as projects were still at an early stage of execution. While SAPE’s financial condition has improved (net gearing of 0.64x vs. 1.73x as of 3QFY19) with the recent rights issue and completion of divestment, its projects are still ramping up slowly with recovery expected only towards 2H once projects commence on the construction phase. The drilling segment will likely be a drag with no near-term immediate catalyst. No changes to our SOTP-based target price of RM0.35 and HOLD rating.

Results Missed Expectations – Final Kitchen-sinking?

SAPE booked in a long list of one-offs which consist of: i) PPE impairment of RM1.4bn (drilling rig: RM1bn, marine assets: RM394m), ii) goodwill impairment of RM108m related to the subsea business and an Australia operation, iii) provision of bad debt for one of its E&C projects amounting to RM176m, iv) ESOS expenses of RM61m, and v) RM80m unrealised forex loss. After excluding these and adding back the Energy profit of RM66.8m for comparison purposes, core losses came in at RM276m. This missed our and consensus expectations, due to poorer-than-expected E&C margins.

Near-term Catalyst Depends on the Yard Ramp-up

The activities of Lumut yard is expected to ramp up to 29,000 tonnes in 2019 vis-à-vis a low of 5,000 tonnes in 2018, mainly driven by Pegaga and ONGC’s 98/2 Central Processing Platform (CPP) projects, and the Gorek, Larak-Bakong wellhead platforms. The work visibility is expected to be sustained into FY2021 at 38,000 tonnes as a result of accelerated Pegaga CPP work progress. SAPE has been aggressive in securing new jobs (FY19: RM9.3bn), resulting in an increase in its order book size to RM17.2bn (FY18: RM14.9bn).

Maintain HOLD

We lower our 2020-21 earnings forecasts to reflect the changes in earnings recognition for its Energy segment going forward (from consolidated method to equity accounting) and cut our margin assumptions to factor in the likely delay in recovery to 2HFY20. We forecast a decline in FY22E earnings as the Brazil PLSV firm contracts will expire, and SAPE is likely to renew or secure new clients at lower rates. We maintain our HOLD rating with an unchanged target price of RM0.35 as we expect a couple more quarters of muted numbers before a recovery.

Risks to Call

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

Source: Affin Hwang Research - 26 Mar 2019