Sapura Energy’s (SAPE) 1QFY21 earnings were ahead of expectation largely on lower costs. E&C reported substantially higher margins, although this may not be repeated. Group cost structure remains high but ongoing cost rationalization should reduce opex by RM650m. With the ongoing issues to be dealt with amid the low oil-price environment, we maintain our Sell rating but raise our target price to RM0.07 after narrowing our loss assumption and rolling forward our valuation horizon.

Lower Costs Structure Benefited 1QFY21

The yoy improvement in 1QFY21 results was driven by a 3.6ppts improvement in EBITDA margin as a result of its ongoing cost rationalization, RM76m reduction in finance cost and RM19m higher in other income relating to advances provided SAPE to its Brazil JV operations. E&C revenue was 20% lower on deferred activities, although drilling revenue was higher 5% yoy. Average number of operating rigs were similar qoq at 7 units but will reduce by 1 unit in 2QFY21. Overall, the result improvement was mainly driven by lower costs, rather than higher activities. Management targets to lower opex and capex by RM650m and RM150m respectively in FY21. SAPE plans to finalize its debt restructuring exercise by end-2020, with a 10-year extension (guided with no increase in interest rate). In addition, SAPE plans to raise an additional RM1.5bn of working capital, which will further stretch its already high current net gearing of 1.05x (4QFY20: 1.03x).

Maintain Sell

We narrow our earlier loss projections by 12-30% to reflect the lower group cost structure, and the high 1QFY21 E&C margins. Notwithstanding, we expect the share price will see an overhang with no catalyst over the near term until SAPE can resolve its problems in hand: ongoing debt refinancing, cost rationalization and the need to secure even more contracts to offset the risk of further order book deferment. We maintain our Sell rating and roll forward our SOTP-derived target price to RM0.07 (from RM0.05). Key upside risks to our call include a rebound in global oil prices, betterthan-expected rig utilisation and more new contracts

Source: Affin Hwang Research - 30 Jun 2020