Results

• Narrower losses – Sapura Energy posted a lower net loss of RM116m in 2QFY20 compared with a net loss of RM199m in 2QFY19 due to improvement in both Engineering & Construction and Drilling divisions.

• Surge in revenue - Quarterly revenue jumped 87% YoY to RM1.9b due higher revenue both E&C and Drilling.

• E&C back into the black – Quarterly revenue from the E&C segment increased 113% YoY and 18% QoQ to RM1.66b. The division posted a PBT of RM27m vs loss before tax of RM20m in 2QFY19.

• Lower loss in drilling – Quarterly revenue from Drilling increased 7% YoY and 18% QoQ to RM272m with 6 rigs operating, 3 rigs to restart operations and 7 rigs being stacked. Loss before tax narrowed to RM36m from RM51m in 1QFY20. Management expects the drilling division to breakeven in FY21 after the 2 rigs begin operations in 3QFY20.

• Mixed QoQ – 2QFY20’s net loss of RM116m was 7% QoQ higher from RM109m in 1QFY20 due to lower PBT from E&C at RM27m (from RM48m) while Drilling posted lower loss before tax of RM36m vs RM51m in the previous quarter. Quarterly revenue rose 18% QoQ due to higher revenue from both E&C (+18%) and Drilling (+18%).

• Improved E&P performance – Meanwhile, the exploration and production (E&P) unit lifted 1.4 MMBoe at a lower price of US$71/barrel against 1.1 MMboe at US$62/barrel in 1QFY20. Management noted that the Phase 1 of SK408 Gorek-Larak-Bakong is on track for first gas by year end.

• Strong orderbook – After securing new jobs worth RM3.1b so far this FY, orderbook was steady at RM16.3b vs RM17.3b last quarter. Going forward, RM4.2b of the orderbook will be booked in the remainder of FY20 followed by RM5.3b in FY21 and RM6.8b in FY22 and onwards. Going forward, Sapura is bidding for RM34b worth of jobs worldwide with more than half of its bid book coming from the Middle East & Africa region.

• Steady gearing – Net debt to equity inched up to 0.69x (from 0.66x in 1QFY20). Management noted that gearing could increase further as it seeks financing to execute its growing order book.

• New contracts – In a separate announcement, Sapura has been awarded new contracts and contract extensions worth RM774m including:

• Provision of Engineering, Procurement, construction and Installation (EPCI) works for the Salman Project in Brunei from FY20 to FY23

• Provision of Procurement, Construction, Hook up and Commissioning (PCC) works for Bardegg-2 and Baronia enhanced oil recovery (EOR) development project for Petronas Carigali expected to be completed by 3QFY20

• Tender assist drilling rig Sapura T-17 in Thailand for 1 year commencing 1QFY21

• Contract amendment and extension for semi submersible tender-assist drilling rig Sapura Berani by Petronas Carigali expected to be completed by 2QFY21

• Contract extension for semi-submersible tender-assist drilling rig Sapura Pelaut for 1 year from Brunei Shell Petroleum Company.

Earnings Outlook

• Earnings below expectation – 1HFY20 normalised net loss of RM243m is below our estimate while six months revenue met expectation after hitting 57% of our full year estimate.

• Forecasts reduced – We are lowering our forecasts for FY20 to a net loss of RM388m and FY21 earnings slashed by 59% respectively due to slower-than expected recovery.

• We expect earnings to start improving in 4QFY20

as E&C jobs progress to the backend stages which book higher portion of profit while the drilling division will see 2 more rigs in operation. FY21 will be driven by its Exploration and Production (E&P) JV as first gas from the SK408 is expected in end-CY2019.

Valuation & Recommendation

• 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 RM1.00 per share.

Source: JF Apex Securities Research - 30 Sept 2019