Results

• Earnings improved – Sapura Energy posted a net profit of RM17.2m in 3QFY21 compared to a net loss of RM101m in 3QFY20 after operating cost was slashed by 58% YoY, higher other operating income and higher contribution from associates.
• Drop in revenue - Quarterly revenue dropped 25% YoY to RM1.33b due to declines in contribution from both Engineering and Construction (E&C) and Drilling divisions.
• Lower QoQ – Sapura’s net income of RM17.2m dropped 28% QoQ despite revenue climbing 9% QoQ as earnings growth from its Exploration & Production (E&P) JV failed to cushion the decline in E&C and Drilling.
• Better margins in E&C – Quarterly revenue from the E&C segment dropped 35% YoY but climbed 16% QoQ to RM1.2b. However, the division posted profit before tax of RM156m (+870% YoY and -28% QoQ).
• Drilling losses widened – Quarterly revenue from Drilling declined 28% YoY and 29% QoQ to RM133m with 6 rigs operating and 8 rigs being stacked. The division posted a loss before tax of RM73m (vs losses of RM48m in 2QFY20 and RM32m in 2QFY21 respectively).
• E&P lifted by higher oil prices - Sapura’s E&P JV, Sapura OMV posted PBT of RM33m due to stronger oil prices and higher production. Number of barrels lifted rose to 2.9m barrels from 2.8m in 2QFY21 following higher production from SK408 fields. Average price increased to US$42.2/barrel from US$36.6/barrel in 1QFY20.
• Clear visibility – Sapura’s orderbook stands at RM12.5b after new contract wins of RM2.2b year-todate. Going forward, RM2b of the orderbook will be booked in 4QFY21 followed by RM5.5b in FY22 and RM5b in FY23 and onwards. Going forward, Sapura is bidding for RM39b worth of jobs worldwide including renewable energy projects.
• Stable gearing – Net debt to equity was steady at 1.06x (from 1.04x in 2QFY21) as cash reserves declined to RM500m vs RM732m in 2QFY21. The management is in the final stage of refinancing, which is expected to complete by January 2021. So far, it has secured RM1.2b of working capital to execute more projects and facilitate business growth.
• Cost optimisation bears fruit – 9MFY21 EBITDA margin rose to 19% from 7% in 9MFY20 due to ongoing cost cutting. The management has recognised RM1.1b worth of value that could be saved out of which RM600m has been fully implemented with RM240m realized.

Earnings Outlook

• Earnings below expectation – 9MFY21 net profit and revenue was within expectation after hitting 41% and 63% of our full year forecast respectively.
• Forecasts lowered - We are reducing our FY21 profit estimates by 24% but keeping our revenue forecast. Earnings momentum will continue pursuant to the company’s cost rationalisation and higher oil prices.

Valuation & Recommendation

• We are keeping our recommendation at BUY with a lower target price of RM0.17 (previously RM0.20) based on 3-year mean P/B and a NTA of RM0.60 per share.