SAPE’s 9MFY20 missed expectations again on higher drilling segment losses and lower JV profits. E&C margins continued to be razor thin leaving little room for error. Operationally, losses in 4QFY20 will likely narrow with higher drilling rig utilization and a rebound in JV contribution as Sapura Topazio has secured a 1-year contract extension while SapuraOMV expected to break even. With limited near term catalyst in sight, maintain Hold but with a lower TP of RM0.28.

More Misses in 3QFY20

SAPE’s 9MFY20 core loss missed expectation again, despite us projecting losses that were already significantly higher than the street at RM357m vs. consensus RM220m. The deviation was due to the razor thin E&C EBITDA margin which stood at 1% in 9MFY20 (vs. our previous forecast of 2%). Drilling losses also widened as the number of working rigs fell to 5 units (2QFY20: 6 units), which was rather unexpected. Sapura Topazio also saw 2.5 weeks special periodic survey (SPS) downtime leading to a drop in JV profit. The JV contribution was also dragged down by a RM17m write off in SapuraAcergy investment. On the flip side, the SapuraOMV JV reported a RM14m profit (vs. RM6m loss) due to an overestimation of depreciation following the finalization of purchase price made earlier by OMV. Net gearing remained near 0.7x level but net debt position has notably increased to RM9.9bn (4QFY19: RM8.9bn)

FY21 Profit Turnaround Looks Out of Reach

We increase our projected FY20 losses by 27% as we lower our E&C EBITDA margin to 1% (from 2%), and assume weaker earnings from Brazilian operations, factoring in lower renewal rates for Sapura Topazio and the near 1 month downturn from its SPS exercise. We now assume FY21E to register a RM41 loss (from a breakeven earlier) and lower FY22E profit forecasts by 25% mainly on a less aggressive margin improvement.

Maintain Hold

The stock price has been muted despite the recent O&G rally as business recovery still looks quite a distance. We expect recovery in E&C margins to only materialize from 2HFY21 onwards with major projects gradually moving to the higher execution margin phase. We maintain our Hold call until clearer signs of an earnings recovery emerges. We lower our SOTP-based 12- month TP to RM0.28 (from RM0.30).

RM615m Contract Win

Separately SAPE announced contract wins comprising E&C contracts based in Malaysia, Mozambique and Brazil, consisting of i) EPCC+I for Phase 3 faciltiies in North Malay Basin to be completed by 2QFY22, ii) subsea installation vessel to be completed in 4QFY21, and iii) contract extension for Sapura Topazio for 1 year (ending 4QFY21). SAPE also announced an extension contract for Sapura Esperanza with Sabah Sarawak Shell to drill 6 wells for Malikai’s Phase 2 campaign. With these new contracts in hand, the group’s current outstanding orderbook is at RM15.1bn, slightly lower than RM16.9bn in 2QFY20.

Risks to Call

Key downside risks include sharp decline in global oil prices, delay in project execution and weaker drilling rig utilisation.

Source: Affin Hwang Research - 6 Dec 2019