9M18 results was a huge miss dragged by unexpected losses of RM260.3m incurred in 3Q18 on weaker drilling and E&C segments. Uncertain timing of contract award remains a concern to SAPNRG even though tender enquiries were active. Following substantial earnings downgrade to losses in FY18-19, we downgrade the stock to UP with a revised TP of RM0.82 pegged to lower FY19E PBV of 0.4x on higher impairment, cash flow and earnings risks.

Below expectations. 9M18 core net losses of RM217.9m missed expectations against our/consensus profit forecasts of RM86.2m/RM85.9m largely due to lower-than-expected contribution from E&C and drilling segment. No dividend was declared, as expected.

Unexpected losses in 3Q18... Sequentially, SAPNRG slipped into losses of RM260.3m from profit of RM36.9m in 2Q18 after stripping off: (i) unrealised forex gain of RM32m, and (ii) share of loss of RM46.1m on disposal of Sapura 3000 by SapuraAcergy. In tandem with a 23% fall in revenue, the poorer performance was largely marred by: (i) lower profit booked in by E&C segment (-87% QoQ), widening losses with lower rig utilisation (5 rigs working in 3Q18 vs. 6 rigs in 2Q18), and (iii) higher tax expense (+14x QoQ).

…dragging 9M17 into the red. On YoY basis, SAPNRG also slipped from core earnings of RM158.1m in line with top-line decline of 42%. The disappointing results is mainly attributable to loss-making drilling segment (5 rigs vs. 10 rigs in 3Q17) and weaker E&C segment (-94% YoY) as a result of lower work orders and billings. However, it was cushioned by better performance from energy segment (+3.9x YoY). Energy segment’s earnings improvement was largely helped by higher average lifting oil prices at USD58/bbl vs. USD45/bbl in 3Q17 and higher production of 0.9mmboe vs 0.8mmboe in 3Q17. Cumulatively, SAPNRG also tanked into the red with losses of RM217.9m from RM343.4m in 9M17 no thanks to weaker drilling segment and E&C segments (-31% YoY) nullifying better contribution from energy division (+5.1x YoY).

Job market landscape remains competitive. We are guided that although the job bidding market remains competitive (tender book of USD9.5b), it has improved over the past few months. However, the timing of contract awards is still uncertain pending approvals from oil majors. Its latest order-book position remained flattish at RM15.1b in 3Q18 backed by YTD win of RM2.8b. The company expects RM1.7b to be recognised in 4Q18 and RM4.3b to be recognised in FY19, where RM0.5b-2.1b is attributable to its JCE.

Projecting losses of RM350.0m-RM385.7m in FY18-19E from profit estimates RM86.2m-RM141.2m previously after factoring: (i) widening losses from drilling segment as a result of higher-than-expected fixed cost, and (ii) lower earnings from E&C segment.

Downgrade to UNDERPERFORM call. Following substantial earnings cut, we downgrade the stock to UNDERPERFORM with lower TP of RM0.82 (from RM1.55 previously) pegged to lower PBV of 0.4x from 0.7x. This is despite the share price falling 40% YTD as we see further downside risk on: (i) increasing impairment risk for its drilling assets, and (ii) weakening operational cash flows (-RM200m in 3Q18) heightening financial risk (net gearing of 1.26x as of 3Q18) amidst uncertain timing of contract award. Such valuation trades below - 1.5S.D. to its 5-year mean pegged to the trough valuation of heavy asset upstream services players without immediate liquidation risk. Upside risks to our call; (i) unexpected sharp surge in oil prices and (ii) stronger-than-expected contract wins.

Source: Kenanga Research - 8 Dec 2017