Despite posting headline net profit, FY19 results missed expectations by posting core loss of RM936m owing to losses in E&C segment. Nonetheless, we expect a return to the black from FY20 onwards, anticipating a stronger 2H20, underpinned by its two-year high order-book of RM17.2b. Overall, we see a post-restructured SAPNRG as a prime beneficiary of upstream O&G activities both globally and locally. Maintain OUTPERFORM, with higher TP of RM0.43.

FY19 huge core loss. Despite reporting headline earnings returning to the black, FY19 results actually came in with core loss of RM935.9m, arrived at after stripping off impairments and gains on disposals - greatly missing our and consensus losses forecasts of RM398.2m and RM399.3m, respectively. The huge disparity was mainly due to large losses from its E&C segment in 4Q19. However, special dividend of 0.5 sen was a positive surprise.

Results dampened by E&C losses. As mentioned, the widened core losses in 4Q19, both QoQ & YoY, were caused by huge losses in its E&C segment. We gathered that the E&C core operational losses were due to provisions made during the quarter, arising from issues such as project delays and costs overruns, estimated to be ~RM170m. Without the provisions, the segment would have posted about core breakeven, or incur slight core losses during the quarter. Similarly, for YTD, widened losses were also due to poorer E&C segment. Noteworthy to mention is that despite its net-gearing improving to 0.6x, from 1.7x in the previous quarter, due to funds raised from its restructuring exercise, its total borrowings still remain somewhat relatively unchanged at RM17b. Hence, finance costs savings have still yet to be captured during the quarter. That said, we expect the gazetted borrowings will be repaid by end-1Q20.

Outlook expected to improve. Overall, we see 4Q19 as a kitchen sinking quarter, with the company taking the opportunity to further book in impairments as well as provisions. Having recently concluded its corporate exercises (entailing rights issue and 50%-stake sale of its E&P arm), we see a post-restructuring SAPNRG as a potential prime beneficiary of upstream oil and gas activities both locally and globally, underpinned by its 2-year high order-book of RM17.2b. Meanwhile, anticipating a stronger 2H20, we believe FY20 core earnings should return to the black, driven by: (i) interest savings, (ii) depreciation savings from the RM1.5b impairments made during the quarter, and (iii) profit recognition from its order-book, with jobs load-out mostly occurring in 2Q-3Q20.

Maintain OUTPERFORM, as we see limited downside from here given its improving outlook. We gathered that bank underwriters of the rights issue should have already cleared their stake, and hence we see little trading sentiment overhang from here. Meanwhile, post-results, we conservatively slash our FY20E earnings by 80%, after (i) adjusting finance costs assumptions given its borrowings payments schedule, while also (ii) massively realigning our E&C order-book recognition and margins assumption. However, given its improving prospects and expected turnaround in FY20, we value the company at a higher TP of RM0.43, pegged to 0.5x PBV on FY21E (raised from previously RM0.34, pegged to 0.4x PBV on FY20E). We feel our ascribed valuations to be justified, seeing limited downside, backed by our ROE study, given its FY20E ROE of 1.3%. Our valuation is also in-line with its fabrication peer MHB, trading at similar 0.5x PBV.

Risks to our call include: (i) poorer-than-expected margins, (ii) lowerthan-expected order-book replenishment, and (iii) failures in job executions.

Source: Kenanga Research - 26 Mar 2019