Sapura Energy’s 1QFY20 earnings missed expectations, although its core loss narrowed by 41% qoq. The loss would have been smaller but was dragged down by some one-off accounting adjustments post its recent restructuring. With valuations still not looking too attractive and operationally loss-making, we prefer to adopt a wait-and-see approach despite the stock looking to have troughed. Maintain HOLD and RM0.35 target price.

Not a Clean Quarter…

There was a list of one-offs in 1QFY20: 1) RM25m forex gain, 2) PPE disposal gain of RM11m, 3) RM88m claim received from a previously completed acquisition, and 4) fair-value ESOS recognition of RM70m. We excluded these to derive our 1QFY20 core loss of RM163m. Operational losses could have been smaller, but were impacted by additional one-offs consisting of a RM60m accelerated amortization from the recent early debt repayment and a RM17m reduction in the Energy contribution due to a purchase-price accounting adjustment post divestment to OMV, which doesn’t fall under the definition of exceptional items to be excluded.

… But Better 2HFY20 Results Expected

Nevertheless, 2HFY20 is expected to see a stronger quarter driven by an improvement in the drilling segment on the back of higher operating rig count with T-9, T-10 and Jaya commencing their contracts (rigs in operation will increase from the current 5 units to 8 rigs from 3QFY20 onwards). The E&C segment is also expected to perform better as projects progressively see a ramp-up in terms of execution, in addition to the interest cost savings.

Maintain HOLD

We maintain our HOLD rating with our target price left unchanged at RM0.35 based on a SOTP valuation. With the macro environment already so uncertain, we prefer to see more meaningful and clearer signs of an earnings recovery for SAPE. From a valuation angle, the stock doesn’t look appealing as well. Key upside/downside risks to our call include 1) contract wins, 2) rig utilisation, and 3) forex movements.

Source: Affin Hwang Research - 28 Jun 2019