Results

• Lower profit – Sapura Energy posted a normalised PATAMI of RM29m in 2QFY18, dropping 61% YoY but rising 4% QoQ. The lower earnings YoY were due to higher interest expense and lower contribution from associates and joint ventures.

• Revenue declined - Quarterly revenue fell 1.1% YoY and 6.4% QoQ to RM1.66bn following decline in revenue from Drilling and Energy divisions.

• E&C sustaining profit – Revenue from Engineering & Construction (E&C) increased 58.3% YoY and 5% QoQ to RM1.66bn. PBT was flat at RM127m vs RM120m in 2QFY17.

• Loss from drilling – However, revenue from Drilling dropped 48% YoY and 28% QoQ to RM278.6m with 6 rigs operating and 10 rigs being stacked. The drilling division posted a normalised loss before tax of RM85m due to higher depreciation vs PBT of RM50m in 2QFY17.

• Drilling remains challenging - Going forward, Sapura is bidding for 2 overseas semi-tender drilling jobs and 1 tender barge contract. The T-12 rig will be stacked in 2HFY18 while Alliance will start drilling in April 2018 in Brunei under a 5+5 years contract with Shell.

• E&P division– Revenue from Exploration and Production (E&P) decreased 54% YoY and due to the cessation of Berantai Risk Service Contract and 16.6% QoQ to RM162m after lifting 0.8 MMboe in at a lower price of US$50/barrel vs 0.8 MMboe in 1QFY18 @ US$52/barrel. PBT from the segment surged to RM22m from RM6m in the previous year. Management guided that its EBITDA breakeven price ranges between US$30 to US$35/barrel. Going forward, the SK310 B15 field is expected to produce first gas in November (end 3QFY18).

• Dwindling orderbook – Orderbook depleted to RM15.1bn (vs RM17bn in 1QFY18) upon job completion. Going forward, RM3.2bn of the orderbook will be booked in 2HFY18, followed by RM3.4bn in FY19 and RM8.5bn in FY20 and onwards.

Earnings Outlook

• Profit below expectation – First half PATAMI of RM56m came below our expectation after achieving only 15% of our full year estimate after it was hit by tax rate of 59%. Management expects tax rate to normalise towards mid 20s in 2HFY18. Six months’ revenue was within forecast after accounting for 45% of our FY18 target.

• Earnings forecast reduced – We are slashing our EPS forecasts for FY18 and FY19 by 62% and 63% respectively as performances by Drilling and E&P divisions as well as associates are weaker than expected.

• Risk – The group faces challenges in replenishing its orderbook amid tough operating environment despite recent gains in oil prices. Management expects oil majors to remain cautious and would start accelerating capex investment by 2019. Immediate catalyst for the stock is the potential award of maintenance, construction and modification jobs from Petronas.

• Steady gearing – Net debt/equity ratio was slightly higher at 1.18x despite repayment of debt of RM1.3bn.

Valuation & Recommendation

• We are keeping our recommendation at HOLD with a lower target price of RM1.48 (from RM1.60) based on 0.7 times P/B which is at the lower range of the stock’s trading band of 0.65x to 1.10x P/B in the past 2 years.

Source: JF Apex Securities Research - 28 Sept 2017