1Q20 losses were deemed to be broadly within expectations given an anticipated turnaround in the 2H. Overall, losses managed to narrow on depreciation savings coupled with improved E&C and drilling. The company also announced RM1b worth of contract wins, bringing YTD-wins to RM2.3b and order-book to RM17.3b. Maintain OP with unchanged TP of RM0.43, being a tactical turnaround play with limited downside.

1Q20 deemed broadly in-line. 1Q19 registered core loss of RM120m, against our full-year earnings forecast of RM50m and consensus of RM130m. However, we deem the set of results to be broadly in-line of expectations, in anticipation of a turnaround in the 2H, driven by [i] drilling segment breakeven on higher rig utilisation (set to reach ~50% utilisation in 2H, from current 33%), [ii] improved engineering and construction (E&C) earnings from order-book recognition and margins expansion driven by jobs load-out in 3Q onwards, [iii] interest savings from borrowings repayment following the completion of its recapitalisation, and [iv] continued depreciation savings following massive impairments of RM1.5b last year. Meanwhile, no dividends were announced during the quarter, as expected.

Trimmed losses. Overall, losses managed to narrow this quarter, due to (i) improvements in E&C, in-line with revenue growth due to greater jobs recognition, (ii) lower drilling losses, and (iii) reduced depreciation expenses following the impairments recognised last quarter. However, noteworthy of mention is its finance costs managed to stay relatively flat, despite the reduced borrowings, due to a recognition of financing amortisation costs of around RM60m following the borrowings paredown (i.e. costs relating to the borrowings which were due to be amortised throughout the lifespan of the loan were being brought forward and booked-in this quarter as the borrowings no longer existed after being repaid). Thus, expect upcoming quarters to post more “normalised” finance costs, which will better reflect the borrowings paredown from its recapitalisation efforts.

Contract wins of ~RM1b. Separately, the company also announced 10 new contract awards (7 E&C, 3 drilling) valued at ~RM1b in total. We are undoubtedly positive on the contracts win, highlighting the company’s global competitiveness and contract winning capabilities. In fact, one of which is the company’s first ever offshore windfarm contract, thus opening up an entirely new market that the company can tap into. These new awards bring YTD-wins to RM2.3b and order-book to RM17.3b, providing visibility for 3-4 years. Meanwhile, the company’s current bid-book stands at USD6.8b, half of which is from the Middleeast and Africa. Post-results and contracts award, we made no changes to our FY20-21E earnings, with the new contracts still within FY20E our order-book replenishment of RM5b.

Maintain OUTPERFORM, with an unchanged TP of RM0.43, pegged to 0.5x PBV – in-line with current trading valuations of its O&G fabrication peer MHB. SAPNRG remains as our selected tactical play with limited downside, capitalising on its turnaround story in the 2H. Further catalysts may come from successful earnings delivery and further contract wins.

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

Source: Kenanga Research - 28 Jun 2019