3Q19 results came within our expectations, with losses narrowed thanks to the recovery in its E&C arm. Meanwhile, SAPNRG had also bagged an EPCIC contract worth RM1.5b, bringing YTD wins to RM8.5b and order-book to RM18.6b – its highest in three years. We increased FY19-20E earnings by 2-9%, as we raised our contract flow replenishment assumption to RM9b, from RM8b previously. Maintain MP with cum/ex-TP of RM0.41/RM0.34, pegged to 0.4x PBV.

9M19 losses no surprise. SAPNRG recorded 9M19 net loss of RM292.9m, in-line with our expectations, making up 72% of our full- year loss forecasts. However, the results missed consensus loss forecasts of RM222.2m, which we believe was due overly optimistic expectations on its engineering and construction (E&C) segment. No dividends were announced, as expected.

Narrowed losses this quarter. Cumulatively, 9M19 net loss widened 34% YoY, mainly dragged by lower E&C contribution (-83% YoY) due to lower jobs executed, partially offsetting: (i) narrowed losses from drilling segment (12%) from improved utilisation, and (ii) increased exploration and production (E&P) contribution from higher lifted volumes coupled with higher crude lifting prices.

However, for the individual quarter of 3Q19, net loss narrowed 88% to RM31.1m YoY, similarly thanks to: (i) higher E&C contributions, (ii) narrowed drilling losses, and (iii) improved E&P contributions. Sequentially, net losses also narrowed 75% QoQ, with its E&C segment recovering from losses last quarter to record a segmental PBT of RM39.6m due to greater progress from jobs at hand. Meanwhile, drilling losses also similarly narrowed and E&P improved from higher lifting prices.

New contract award. In a separate Bursa filing, SAPNRG also announced that it and its consortium partner Afcons have been awarded an engineering, procurement, construction, installation and commissioning (EPCIC) contract for the Central Processing Platform (CPP) for KG-DWN 98/2 NELP block in India, by ONGC, with a total contract value of RM3b. Taking into account SAPNRG’s 48.3% stake, this would mean a net stake of RM1.47b from the contract, bringing YTD wins to RM8.5b and order book to RM18.6b – its highest in 3 years. We are positive on the contract win, as it (i) further reiterates its healthy contracts flow and commendable jobs execution record, and (ii) brought YTD wins to exceed our replenishment assumption of RM8b. We expect PBT margins for the contract to be at around mid-single digit percentage. Post-contract award, we revised our FY19-20E earnings upwards by 2-9% as we raised our replenishment assumption to RM9b.

Maintain MARKET PERFORM. Although we are increasingly positive on its post-FY20 outlook, driven by: (i) fresh injection of capital from its recapitalisation exercise and 50%-stake disposal of its E&P arm, and (ii) high order-book and healthy contracts flow, we opt to maintain our MP call for now, as we see some overhang from its upcoming rights issue given high capital injection required from shareholders coupled with the highly diluted share base. Our cum/ex-TP is retained at RM0.41/RM0.34, pegged to 0.4x PBV.

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

Source: Kenanga Research - 07 Dec 2018