Results

• Quarterly loss – Sapura Energy posted a net loss of RM2.3b in 4QFY18 vs a net loss of RM173m in 4QFY17 and RM275m in 3QFY18. The loss was mainly attributed to non-cash impairment of RM2.1b which was mostly on drilling rigs.

• Impairment on assets – Out of the RM2.1b impairment, RM2.06b was for 12 of the 15 drilling rigs while the remaining RM70m was for vessels. The management noted the impairment would result in a lower cost base, enhanced competitiveness and improved profitability.

• Lower revenue - Quarterly revenue fell 42% YoY and 23% QoQ to RM1.28b following decline in revenue from Engineering & Construction (E&C) and Drilling divisions.

• E&C loss widened – 4QFY18 revenue from the E&C segment decreased 42% YoY and 18% QoQ to RM670m. The unit’s operating loss widened to RM84.2m from RM29.3m in 3QFY18.

• Narrowed losses from drilling – Quarterly revenue from Drilling dropped 42% YoY and 8% QoQ to RM230.4m with 5 rigs operating and 10 rigs being stacked. The drilling division posted a normalised PBT of RM52m vs loss of RM93m in 3QFY18 due to the impairment which resulted in lower depreciation.

• Better E&P performance – 4QFY18 revenue from Exploration and Production (E&P) increased 5% YoY and 38% QoQ due to RM287m after lifting 1.19 MMboe in at a higher price of US$69/barrel vs 0.8 MMboe in 3QFY18 at US$58/barrel. Operating profit improved to RM 26.4m from RM8.7m in the previous quarter.

• Near term catalyst - The development of SK310 B15 field was recently completed and will start contributing in FY19. Earnings from the field is expected to sustain earnings in FY19 as the outlook for E&C and drilling remains challenging. Going forward, SK408 will come on stream in late CY2019. Sapura’s net reserve stands at 253 mmboe (95% gas, 5% oil) that could last for over a decade.

• Steady orderbook – Orderbook improved to RM16.6b after winning RM2.7b worth of new contracts so far this year. Going forward, RM5.6b of the orderbook will be

booked in CY18 followed by RM3.1b in CY19 and RM7.9b in CY20 and onwards. Sapura Energy has more than doubled its bidding to RM50b globally from RM20b previously and aims to raise its orderbook to RM18b- 20b in the next two years.

Earnings Outlook

• Earnings below expectation – FY18 normalised net loss of RM325m came below our expectation of RM133m net loss. Twelve months’ revenue of RM5.9b was below forecast after accounting for 78% of our FY18 target.

• Earnings forecast maintained – We are keeping our forecasts for FY19F and FY20F as prospects are expected to be flat until earnings stream start to flow from the SK408 field and activity in the oil and gas industry takes off.

• Risk – The group faces challenges in replenishing its orderbook amid tough operating environment despite recent gains in oil prices as capex spending has yet to pick up.

• Higher gearing – Net debt/equity ratio was higher at 1.56x vs 1.26x in 3QFY18 as cash declined slightly to RM1.78b coupled with effect of asset impairment.

Valuation & Recommendation

• We are keeping our recommendation at BUY with a lower target price of RM0.80 (previously RM1.06) based on 0.5x P/B and a lower NTA of RM1.60 per share following the impairment.

Source: JF Apex Securities Research - 29 Mar 2018