• 3QFY21’s RM27m core loss (9MFY21: RM23m) was in line with our full-year loss forecast (RM68m), but missed consensus expectation (RM153m)
• Multiple headwinds include ongoing restructuring of its RM10bn corporate debt (delayed until end Jan-21) and high net gearing of >1x, bringing down stubbornly high overheads, and order book materialization amid current oil price environment
• Reiterate Sell rating and SOTP-derived target price at RM0.10

Results met our expectation

SAPE reported 3QFY21 profit of RM17m (3QFY20: RM101m loss, 2QFY21: RM24m profit). After stripping out the RM50m additional income from the earlier disposal of its 50% stake in SapuraOMV and adding back forex losses, headline profit turned to a RM27m core loss. This also wiped out earlier profits, resulting in cumulative 9MFY21 core loss of RM23m (9MFY20: RM367m loss). 3QFY21 revenue increased 9% qoq on higher E&C project execution (yard/vessels utilisation: 50%/65%), but was offset by lower operational rigs (7 vs 6 rigs). SAPE is expected to sustain the similar 6 rigs in operation in 4QFY21 and increasing to 7 rigs in 1QFY22. To date, SAPE has drawn down RM165m out of the recently secured RM1.5bn in additional working capital.

SapuraAcergy’s one off profit drove better associate contribution

The associate profit of RM81m was predominantly contributed by RM31m of one-off income from SapuraAcergy, despite the business already being wound down, due to completion of certain projects. Brazil PLSV’s profit was down to RM31m (adjusted for technical fees charged by SAPE) vs RM35m in 2QFY21, which we believe was partly affected as COVID cases worsened. The absence of deferred tax asset reversal also contributed to a profit turnaround for the Energy division (3QFY21: RM33m profit vs 2QFY21’s RM55m loss) resulting in stronger overall associate contribution. The Topazio PLSV contract is expected to expire by end-Dec 20 and is in the midst of submission for a new contract.

Lack of catalysts, maintain Sell

SAPE’s key overhangs remain its ongoing debt restructuring, initiatives to bring down overheads and materialization of its order book, currently at RM12.5bn, a slight reduction from RM13.3bn in 2QFY21. With limited near term catalysts, we reiterate our Sell rating on the stock. Maintain our SOTP-based target price at RM0.10, which represents a 20% downside. Upside risks: better operational margins, recovery in global oil prices and higher contract wins.

Source: Affin Hwang Research - 22 Dec 2020