Despite core net losses of RM251.4m, FY18 results surpassed our expectation on stronger E&C segment. We gather that the tender market is improving with E&C services leading the way. Thus, we narrow FY19E losses by 47% on higher replenishments and lower depreciation while expecting a turnaround in FY20. Reiterate OP call with a lower TP of RM0.770 pegged to 0.5x FY19E PBV.

Above our expectations. FY18 core net losses (CNL) of RM251.4m came above expectations due to better-than-expected E&C contribution and lower-than-expected depreciation charge but disappointed the street by exceeding its CNL forecast by 16%. We reckon the negative deviation is largely due to the more bullish forecats by consensus in the E&C and drilling segments. No dividend was declared, as expected.

Narrowed losses in 4Q18. Sequentially, SAPNRG narrowed its CNL by 87% QoQ to RM33.5m in 4Q18 after stripping off: (i) unrealised forex losses of RM123m, (ii) gain on PPE disposal of RM4.2m, and (iii) impairment charge of RM2.1b primarily on 12 drilling rigs. The stronger performance was helped by: (i) narrowed losses for drilling segment despite flattish utilisation with 5 rigs working led by lower depreciation, (ii) stronger energy segment (+2.1x QoQ; higher lifting oil prices and production), (iii) lower finance cost (-8% QoQ), and (iv) lower tax expense (-48% QoQ).

FY18 sank into the red. On YoY basis, SAPNRG also narrowed its CNL by 50% despite revenue falling by 34% dragged by weaker performances from all three core businesses. The stronger results were mainly attributable to lower depreciation (-22% YoY) and positive forex impact (RM42.9m realised forex gain in 4Q18 vs. realised forex losses of RM90.3m). Cumulatively, SAPNRG tanked into the red with losses of RM251.4m from RM241.0m core profit in FY17 no thanks to weaker performance from drilling and E&C segments (-50% YoY).

E&C services leading the recovery. We are guided that tenders have doubled up to USD13b since FY17 with E&C services leading the recovery. Its latest order-book position has marked the first year of improvement to RM16.6b (+11% since end-FY17) after three years of decline from FY15. Meanwhile, SK408 development (Gorek, Bakong and Larak) is on track for 1st gas in FY20-21 with FDP approved while finalising its GSA. SAPNRG will internally fund the SK408 development (c.USD200m capex for the next three years) and proceeds from monetisation of the E&P reserves will be used to repay its borrowings (net gearing of 1.6x as of 4Q18).

Narrowed FY19E losses by 47% to RM204.4m assuming: (i) higher order-book replenishment of RM5.5b from RM4.5b previously in view of better contract flows, and (ii) lower depreciation post asset impairment. Meanwhile, we expect SAPNRG to return to the black in FY20 with RM51.6m profit assuming: (i) RM6.0b order-book replenishment, and (ii) 50% utilisation for the drilling segment.

Reiterate OUTPERFORM call. Following FY18 results, we maintain our OUTPERFORM call on the stock with lower TP of RM0.770 (from RM0.820 previously) pegged to higher PBV of 0.5x from 0.6x. This is premised on: (i) reducing impairment risk after kitchen sinking in 4Q18, and (ii) better contract flows led by E&C services. Downside risks to our call include: (i) weaker-than-expected margins, (ii) lower-than-expected contract replenishment, and (iii) contract termination.

Source: Kenanga Research - 29 Mar 2018