• 2QFY21 result came in above our and consensus estimates on positive Engineering and Construction (E&C) segment margin surprise due to lumpy variation orders recognised during the quarter
• 2HFY21 could see a small loss on wider drilling segment losses with lesser operating rigs (from 7 to 5 rigs), coupled with possible absence of variation orders for the E&C segment
• Lowering our earlier losses assumption. Reiterate Sell, raising our SOTPtarget price to RM0.10

Results above expectation

SAPE reported 2QFY21 profit of RM23.7m, reversing 1QFY21 losses of RM19.7m, bringing cumulative 6M20 core profit to RM4m (6MFY20: RM256m losses). This was above our earlier and consensus full-year estimates with the deviation coming from higher-than-expected E&C margins arising from US$20m variation orders recognised during the quarter. Elsewhere, 2QFY21 revenue declined 37% yoy on lower E&C execution and lower drilling activities with work being suspended during the MCO period and amid the current uncertain oil price environment. Associates also fell into a RM19.5m loss in 2QFY21 amid the slump in global oil prices and reversal of deferred tax assets due to a change in the tax rate (from 38% to 25%), resulting in the Energy business reporting an RM53.6m losses. Brazil PLSV also dragged performance, as it reported a lower RM35m profit (1QFY21: RM83m) due to higher maintenance and COVID19-related costs.

Still waiting outcome on debt refinancing

The RM10bn corporate debt refinancing is still under negotiation with bankers and expected to be completed by December 2020, aiming to extend debt maturity by another 7 years, at least. SAPE has drawn down RM1.2bn of working capital to grow its order book, currently at RM13.3bn (E&C: 45%, drilling 11%, JCE 44%). Bid book now stands at RM29.4bn.

Maintain Sell

We narrow our FY21 losses, expecting a minor loss for the full year to take into account the variation orders claim in 2QFY21, and gradual cost savings in the coming quarters. We also lower our FY22-23 forecasts, imputing a larger cost savings but still expecting losses to widen on the lack of variation orders. We raise our SOTP-based target price to RM0.10 (from RM0.07), which implies a 0.15x P/BV. Reiterate Sell. Upside risks: better operational margins, recovery in global oil prices and higher contract wins.

Source: Affin Hwang Research - 21 Sept 2020