We deem 1Q19 core losses of RM136m as within our estimate as we expect subsequent quarter losses to narrow on higher E&C contributions as well as higher rig utilisation. That said, it missed consensus estimate likely from street’s overly bullish forecast for its E&C and drilling segments. All in, we continue to favour SAPNRG and reiterate OUTPERFORM at RM0.770 with catalyst stemming from further contracts wins.

Expected losses. SAPNRG’s 1Q19 core loss of RM136m was expected and deemed within our full-year loss estimate of RM204m as we foresee the quantum of losses to gradually narrow in subsequent quarters as (i) secured E&C contracts enter into more advance billings stages, coupled with (ii) higher utilisation of drillings rigs. That said, results were below consensus loss estimate of RM82m which we believe was due to consensus’ overly bullish forecasts in the E&C and drilling segments. No dividends declared as expected.

Earnings hit by weak drilling and energy segments. Sequentially, SAPNRG’s core loss widened 3x QoQ to RM136m (from RM34m) mainly due to lower revenue from its drilling (-20%) and energy (-27%) segments. While total number of operational rigs was similar QoQ at 5 rigs; one of the rigs (Sapura Esperanza) was only utilised for 1 month in 1Q19. Furthermore, despite its energy segment producing similar volumes (at 1.1m bboe), the oil:gas split was lower by which 1mmboe of oil is worth more than 1mmboe of gas – leading to weaker contributions. That said, we note that 1Q19 core loss was partially cushioned by better JV & associates (+90%) contributions from its Brazil operations.

Broad-base revenue decline pushed yearly results into losses.

YoY, 1Q19 sank into the red from a core profit position of RM5m in 1Q18 attributed to weaker revenue contributions (-41%) from all three segments (E&C, Drilling and Energy). Drilling segment was dragged by lower utilization of rigs (5 vs. 7) while the lower billings at E&C segment (-45%) were due to lower outstanding order-book recognisable at the beginning of the quarter (RM14.9b at the start of 1Q19 vs. RM16.7b at the start of 1Q18) coupled with higher mix of contracts still at infancy stage. Consequent to the poorer revenues, all segments’ PBTs were also weaker.

However, E&C ramp up for recovery. YTD, SAPNRG has secured RM4.5b in contract awards (within our RM5.5b replenishment) bringing the current outstanding order-book to RM16.7b. We are optimistic on SAPNRG’s ability to achieve our replenishment target backed by tenders worth USD13b and expect E&C contributions to increase as contract works advances. As for its loss-making drilling division, we are anticipating a gradual recovery with rig utilisations to be higher through the recent two awards (secured in 2Q18) for Sapura Esperenza and Sapura Berani. Meanwhile, we are positive with SAPNRG’s entry into Mexico’s Block 30 with the recent PSC signing and farm-in agreements into five offshore exploration permits in New Zealand, which would provide new growth opportunities for the business in the long term.

Maintain OUTPERFORM. Post results, we make no changes to our FY19-20E earnings forecast with expectations of SAPNRG returning to the black in FY20 backed by: (i) RM6.0b order-book replenishment, and (ii) 50% utilisation for the drilling segment. All in, we reiterate our OUTPERFORM call with unchanged TP of RM0.770 pegged to PBV of 0.5x. Our call is premised on better contract flows led by E&C backed by the stronger crude prices and potential listing and monetization of its E&P assets. Downside risks to our call include: (i) weaker-thanexpected margins, and (ii) lower-than-expected contract replenishment.

Source: Kenanga Research - 2 Jul 2018