SAPNRG’s 1H19 results missed expectations as its E&C segment plunged into losses during the quarter. We were guided that this was due to transition of assets utilisation into servicing newer contracts, and hence, should recover as these contracts mature into later stages of progression. While outlook is expected to improve FY20 onwards, we maintain MP call and ex-all TP of RM0.34, given hefty capital injection required coupled with heavy share-base dilution.

1H19 wider-than-expected losses. 1H19 net loss of RM261.8m missed expectations, coming in at 28% and 56% higher than our and consensus full-year losses forecasts, respectively. The mismatch was mainly attributed to its E&C segment, which plunged into losses of RM20.5m in 2Q19 (versus profit of RM126.7m in 2Q18, and RM36.5m in 1Q19). We were guided that this was a result of the segment being in a transitional period towards servicing newer contracts, hence lower asset utilisation (refer below for the breakdown of assets). That said, utilisation is expected to pick up in FY20 onwards once these contracts mature into later stages of progression. No dividends were declared this quarter, as expected.

Losses this year. 1H19 plunged into losses from Core Net Profit of RM42.4m in 1H18, due to poorer performance across various segments: (i) E&C’s earnings dived 95% due to the aforementioned transitional period, causing lower utilisation, (ii) drilling losses widened by 98% on the back of lower rigs utilisation, and (iii) E&P earnings narrowed by 22%, despite higher volume production due to lower oil:gas mix (1 mmboe of oil is worth more than 1mmboe of gas), especially in 1Q19.

Sequentially, 2Q19 net loss narrowed 7% QoQ, driven by: (i) E&P earnings jumping 3x QoQ from higher crude lifting price, (ii) drilling losses narrowed by 15% from improved rig utilisation, while offset by (iii) aforementioned losses in E&C segment.

Capital raising efforts a success? We believe the company’s recapitalisation exercise to raise RM4b is virtually an almost-guaranteed success, with PNB underwriting up to 40% shareholdings, while Maybank and Credit Suisse have committed to underwrite the remaining rights issue. Additionally, we understand that the 50% disposal of its E&P-arm (raising roughly RM3.3b) has also progressed into a binding principal sales agreement. The raised proceeds will be used to pare down borrowings, thus improving the company’s bids winning capabilities as well as providing working capital for jobs execution. All-in, we expect net-gearing to improve to around c.0.7x, from 1.7x as at end-2Q19. Meanwhile, the group has also secured YTD-contract wins of RM5.3b – the highest in the past three years, representing 48% of its FY16-18 contract wins combined, and bringing its latest order-book of RM16.9b.

Earnings adjustment. Post-results, we widened FY19E loss assumption by 105%, while trimming 10% off FY20E earnings, accounting for lower contribution from E&C segment.

Maintain MARKET PERFORM, with an ex-all TP of RM0.34 (or RM0.41 on cum basis), pegged to 0.4x PBV of FY20E. Post-capital injection, outlook for FY20 and onwards is increasingly positive, driven by greater contract flows amidst improved financial positioning in a stable oil price environment. However, we still remain cautious for now, nonetheless, as the recapitalisation would, after all, still require a hefty capital injection by shareholders (RM0.66 per share – RM0.50 for rights, and RM0.16 for RCPS-i) coupled with the huge share base dilution.

Risks to our call include: (i) better-than-expected margins, (ii) greater- than-anticipated job wins, and (iii) falling through of recapitalisation exercise.

Source: Kenanga Research - 1 Oct 2018