Results

• Narrower loss – Sapura Energy reported a net loss of RM31m in 3QFY19, which declined 89% YoY from a net loss of RM274m in 2QFY18. The improvement was due to the turn around in Engineering & Construction (E&C), improved earnings from Exploration and Production (E&P) while the Drilling division continued to register losses.

• Higher revenue - Quarterly revenue rose 17% YoY to RM1.5b mainly due higher revenue from E&C (+17%) and E&P (+43%) while Drilling declined slightly by 2%.

• Improved QoQ – 3QFY19’s net loss of RM31m narrowed 75% QoQ from RM126m in 2QFY19. Quarterly revenue rose 19% QoQ as higher revenue from E&C (+23%) and E&P (+30%) cushioned the decline in Drilling (-3%).

• Stable EBITDA – EBITDA rose 82% YoY and 61% QoQ to RM461m with margin improving to 31% from 23% in 2QFY19 on the back of increased activities, higher asset utilisation and higher oil prices.

• E&C returned to the black – 3QFY19 revenue from the E&C segment increased 17% YoY and 23% QoQ to RM960m due to higher utilisation of vessels. The division posted a profit before tax of RM40m vs loss before tax of RM20m in 2QFY19.

• Narrower loss in drilling– Quarterly revenue from Drilling dropped 2% YoY and 3% QoQ to RM247m with 6 rigs operating and 9 rigs being stacked. Loss before tax narrowed to RM12m vs loss of RM58m in 2QFY19. Management noted that charter rates have remained stable.

• Better E&P performance – 3QFY19 revenue from E&P increased 43% YoY and 30% QoQ to RM296m after lifting 1.1 MMboe at a higher price of US$79/barrel vs 1.1 MMboe in 2QFY18 at US$77/barrel. PBT grew 328% YoY and 33% QoQ to RM237m amid higher crude oil prices and steady production.

• Strong orderbook – Orderbook increased to RM18.6b, its highest in 24 months, from RM16.9b last quarter. This includes the RM3b contract from Oil and Natural Gas Corporation (ONGC) announced yesterday which was secured by its 48.3% JV with Afcons Infrastructure Limited for Offshore Process Platform (Central Processing Platform & Living Quarters) Project for development of KG-DWN-98/2 NELP Block in India.
• Going forward, RM2.3b of the orderbook will be booked in 4QFY19 followed by RM6b in FY20F and RM10.3b in FY21F and onwards.
• Higher gearing – Net debt of equity inched up to 1.73x (from 1.69x in 2QFY18) due to effect of foreign exchange with no new debt incurred. With cash proceeds from the rights issue and stake sale to OMV (expected to be completed in January), management aims to reduce gearing level to 0.7x.

Earnings Outlook

• Earnings below expectation – 9MFY19 net loss of RM293m is below our FY19 estimate of RM125m while quarterly revenue exceeded expectation after hitting 83 % of our full year estimate.

• FY19 forecast tweaked – We are lifting our revenue forecast for FY19 by 11% to RM4.6b while net loss estimate is increased to RM343m from RM125m.

Valuation & Recommendation

• The recent rights issue and partnership with OMV has alleviated the company’s debt troubles. The lower gearing will give more room for the company to push forward and securing new jobs.

• We expect earnings to improve given the gradual pickup in global capex spending as Sapura bids for US$8.8b worth of jobs this year compared to US$2.5b in 2017.

• We are keeping our recommendation at BUY with an unchanged target price of RM0.50 based on 0.5x P/B and a NTA of RM0.99 per share.

Source: JF Apex Securities Research - 7 Dec 2018