Results

• Double whammy – Sapura Energy posted a net loss of RM4.24b in 4QFY20 compared with a net profit of RM497m in 4QFY19 and RM101m in 3QFY20 due to an impairment of RM3.3b. The impairment consists of RM3.04b on goodwill and RM241m on assets due to the impact of COVID-19 and low oil prices. Excluding the impairment, normalised loss after tax for the quarter stands at RM950m.

• Drop in revenue - Quarterly revenue declined 25% YoY and 37% QoQ to RM1.1b due to lower revenue from Engineering and Construction (E&C).

• E&C into the red – Quarterly revenue from the E&C segment dipped 32% YoY and 46% QoQ to RM860m. The division posted a loss before tax of RM755m vs a profit before tax of RM16m in 4QFY19.

• Drilling division breaks even – Quarterly revenue from Drilling improved 1% YoY and 36% QoQ to RM253m with 7 rigs operating and 7 rigs being stacked. The division posted a PBT of RM2m from a loss of RM48m in 4QFY20.

• Continue to execute orderbook – Sapura’s large orderbook of RM13.5b will buoy the company’s revenue during the current downturn. Going forward, RM6b of the orderbook will be booked in FY21 followed by RM3.6b-3.8b in FY22 and RM3.9b in FY23 and onwards. However, there could be risk of contracts being cancelled or deferred. Going forward, Sapura is bidding for RM24b worth of jobs worldwide including renewable energy projects.

• Higher net gearing – Net debt to equity increased to 1.03x (from 0.7x in 3QFY20) as equity shrank to RM9.2b from RM13.9b in 3QFY20 due to the impairment. The management is currently on track to refinance its debt amounting to RM10b and unlikely to make any cash call.

Earnings Outlook

• Earnings below expectation – FY20 normalised net loss of RM1.3b is below our estimate while twelve months revenue met expectation after hitting 104% of our full year estimate.

• Forecasts reduced – We now expect net loss of RM588m (previously net profit of RM190m) for FY21 and revenue of RM6.5b (reduced by 16% from RM7.98) due to the current slowdown in the oil and gas industry amid COVID-19 and low oil prices. Sapura will incur additional costs due to disruption in projects during lockdown.

• Challenges ahead - Sapura faces operational challenges due to COVID-19 as yard activities are suspended, manpower issue due to lockdown and movement controls, and supply chain problems as vendors and clients are imposing force majeure.

• Prolonged recovery – Oil prices are expected to remain weak in the near term as COVID-19 has led to travel bans and lockdowns that slowed global economy and demand for oil. The recent production cut by OPEC+ is not sufficient to match the reduced demand.

• Management expects the industry to be flat at the moment with growth kicking in after 2 years as the current slump in oil prices forced oil producers to cut capex, delay and/or cancel projects.

Valuation & Recommendation

• We are reducing our recommendation to HOLD form BUY with a lower target price of RM0.11 (previously RM0.50) based on -1 standard deviation to its 3-year mean P/B of 0.42x and NTA of RM0.50 per share.

• Rerating catalyst would come after COVID-19 when global economies pick up and demand for oil improves.

Source: JF Apex Securities Research - 30 Apr 2020