SAPE’s 6MFY20 missed expectation on weaker contribution from Brazil and low engineering and construction (E&C) margins as projects are largely still at early execution phase. Together with its result, SAPE also announced that it secured RM774m worth of contracts, bringing ytd orderbook replenishment to RM3.1bn. Nevertheless, with the weak operating environment, we assume FY20 losses to widen and operations to only breakeven in FY21. Maintain HOLD but at a lower target price of RM0.30 (from RM0.33).

Results Missed Expectations

SAPE’s 2QFY20 core loss narrowed to RM115m, bringing 6MFY20 core loss to RM256m (-7.4% yoy). Despite the narrowing of losses, result still missed both our and consensus forecasts. The deviation against our expectation was largely due to lower Brazil profit as PLSV Diamanté has been idle since Jul-19 and underestimation of E&C low margins as projects are mostly still in procurement phase. The saving grace was that drilling losses narrowed on the back of higher rig in operation, totalling 6 units compared to 5 units in 1QFY20. Net gearing position increased slightly from 0.66x in 1QFY20 to 0.7x as cash reduced due to heavy procurement done for the current projects in hand. Current outstanding order book is slightly lower at RM16.3bn (vs. RM17.3bn in 1QFY20).

FY21 Outlook Not as Rozy

We widen our FY20 losses forecast (from RM90m to RM358m) by revising E&C’s EBITDA margin assumption to 2% (from 8%), as our earlier expectation of margin improvement is not materialising and weaker Brazil operation. Meanwhile, a profit turnaround in FY21 is likely to be delayed as we expect breakeven, from RM173m profit. We believe E&C margins will only show an improvement from 2HFY21 onwards with major projects like 98/2 CPP and Pegaga slowly moving on to the higher execution margin phase consisting of transporation and installation (T&I) in which we are lowering our EBITDA assumption to 5%.

Maintain HOLD, Lower Our Target Price

We revised our SOTP-based target price lower to RM0.30 (from RM0.33) after cutting our earnings forecast, but raised our EV/EBITDA multiple ascribed on the E&C business to 12x (from 10x). We believe upside for this stock is capped in the near term as operations will remain loss-making for a few more quarters, until E&C project margins improve. Key risks to our call largely depends on project execution and resulting margins.

Source: Affin Hwang Research - 30 Sept 2019