Sapura Energy’s E&C and drilling divisions, which had seen a few consecutive earnings disappointments, could see better days in the coming quarters on the back of higher rig utilisation. However, we still see risks from poor E&C margins that may potentially drag down the pace of recovery and we now expect FY20E to remain in the red. While we acknowledge that losses are set to narrow, we think that investor demand may remain lacklustre until there are clearer signs of an earnings recovery. We lower our 12-month target price to RM0.33 (from RM0.35). Maintain HOLD.

Business Outlook – Two Sides to a Coin

We expect the drilling division to help narrow overall group losses as rig utilisation improves from the current 33% to ~55% by end-FY20E. Assuming all goes well, the drilling division will likely see profit breakeven by 3QFY20. On the flip side, E&C will likely see some margin pressure – while yard utilisation is projected to improve significantly from the prior year, the execution margin remains a question given the prices in securing these projects under this low oil price environment. The associate profit could also be weaker on lower renewed charter rates as two Brazil pipe lay support vessel (PLSV) contracts are expected to expire in July and Sept- 19. Nevertheless, we remain positive on the E&P division as production levels will see a ramp up in FY21 once the SK408 Gorek, Larak, Bakong (GLB) field achieves first gas by end-2019.

Revising Our Forecasts

We cut our previous FY20 profit forecast to a loss and slash FY21-22E profits by 59%-49%, after imputing lower E&C and drilling margins, and a lower Brazil profit contribution after the contract expiry of 2 PLSV vessels in FY20 and 1 in FY22. Our earnings revision also took into account our lower average Brent oil price forecasts of US$67/bbl for FY20 and US$68/bbl in FY21.

HOLD: Outlook Remains Murky Over the Next Few Quarters

Post cutting our EPS forecasts and rolling forward our valuation to FY21E, we lower our SOTP-based target price to RM0.33 (from RM0.35), and maintain a Hold call until the E&C division shows a more meaningful earnings recovery. Upside and downside risks to our HOLD call include: i) sharp movements in the Brent oil prices and forex, ii) higher drilling rig utilisation, and iii) better-than-expected E&C execution margins.

Source: Affin Hwang Research - 10 Jul 2019