Results

• Earnings improved – Sapura Energy posted a net profit of RM23.7m in 2QFY21 compared with a net loss of RM116m in 2QFY20 after operating cost was slashed by 50% YoY and lower interest by 20% YoY.

• Drop in revenue - Quarterly revenue dropped 37% YoY to RM1.22b due to declines in contribution from both Engineering and Construction (E&C) and Drilling divisions.

• Better QoQ – Sapura’s net income of RM23.7m rose 67% QoQ despite revenue dropping 10% QoQ.

• E&C leads profit growth – Quarterly revenue from the E&C segment dropped 38% YoY and 8% QoQ to RM1.03b. However, the division posted a profit before tax of RM218m (+707% YoY and +76% QoQ).

• Drilling division still in the red – Quarterly revenue from Drilling declined 31% YoY and 22% QoQ to RM187m with 7 rigs operating and 8 rigs being stacked. The division posted a loss before tax of RM32m (vs losses of RM36m in 2QFY20 and RM15 in 1QFY21 respectively). The division’s recovery has been hindered by COVID-19.

• E&P pressured by low oil prices - Sapura’s Exploration & Production (E&P) JV, Sapura OMV posted a loss before tax of RM54m due to lower oil prices and deferred tax adjustments. Number of barrels lifted rose to 2.8m barrels from 2.4m in 2QFY20 following higher production from SK408 fields. However, average price declined to US$36.6/barrel from US$39.4/barrel in 1QFY20.

• Clear visibility – Sapura’s orderbook stands at RM13.3b after new contract wins of RM840m recently. Going forward, RM3.3b of the orderbook will be booked in FY21 followed by RM5.1b in FY22 and RM4.9b in FY23 and onwards. Going forward, Sapura is bidding for RM29b worth of jobs worldwide including renewable energy projects.

• Stable gearing – Net debt to equity was steady at 1.04x (from 1.05x in 1QFY21) as cash reserves was stable at RM732m vs RM711m in 1QFY21. The management currently is on track to refinance its debt with potentially lower interest rates due in line with current rate cuts by central banks.
   
• Cost optimisation bears fruit – EBITDA margin rose to 26% from 15% in 1QFY21 due to ongoing cost cutting. The management has recognised RM1.1b worth of value that could be saved out of which RM450m has been fully implemented with 23% cash impacted.

Earnings Outlook

• Earnings above expectation – 2QFY21 net profit achieved our full year estimate while twelve months revenue was within expectation after hitting 41% of our full year forecast.

• Forecasts lifted - We raise our FY21 profit estimate to RM85m from RM37m while keeping our revenue forecast as we expect earnings momentum to continue pursuant to the company’s cost rationalisation.

• Prolonged recovery – The company could face risks of contracts being cancelled or deferred as well as costs overruns. However, the management noted that it has yet to see significant deferments or cancellation of its orderbook so far.

Valuation & Recommendation

• We keep our recommendation at BUY with a higher target price of RM0.20 (previously RM0.18) based on 3-year mean P/B and a NTA of RM0.60 per share.

Source: JF Apex Securities Research - 21 Sept 2020