Despite improved 1H20 (narrowed losses by 17%), results are deemed below expectations due to weaker-thanexpected earnings from E&C and E&P segments. Meanwhile, SAPNRG announced contract wins amounting to ~RM774m, bringing YTD-wins to RM3.1b and order-book to RM16.3b. Moving forward, coming quarters could still show weak numbers, but a turnaround in FY21 is possible. Maintain OUTPERFORM, with lowered TP of RM0.33.

Improved 1H20 but below expectations. 1H20 registered core loss of RM257.8m (arrived after stripping-off non-recurring items e.g. gains on disposals and forex). While we had expected better performances (1H20 losses narrowed 17% YoY), we deem the improved 1H20 numbers to be inadequate to meet expectations against our forecasted full-year earnings forecasts of RM49.9m and consensus full-year losses forecasts of RM6.6m, although we acknowledge that its performance is expected to further gradually improve going into the 2H of the year. The below-expectation results were due to the slower-than-expected recovery in its E&C division, coupled with extended losses in its E&P division. No dividends were announced, as expected.

Overall improving numbers. 1H20 core loss narrowed 17% YoY, helped by: (i) massively improved performance from its E&C segment, on the back of higher activities on-hand, (ii) narrowed losses in its drilling segment, helped by depreciation savings following massive impairments in 4Q19, coupled with slightly improved rig utilisation, offset by (iii) poorer E&P performances, despite higher production volumes, given its reduced stake, on top of a purchase price adjustment following its 50%-stake disposal of the segment to OMV AG (i.e. post- disposal, book value of the asset was readjusted higher to be closer to fair value), hence leading to increased depreciation expenses. Noticeably, the period also saw lower finance costs – this being the fruition of its earlier concluded rights issue.

YoY, 2Q20 core loss of RM112.6m narrowed 31% YoY, similarly due to: (i) turnaround in its E&C segment, and (ii) narrowed drilling losses, masking poorer E&P – all on the aforementioned reasons. Sequentially, core loss narrowed 22% QoQ, on the back of: (i) narrowed drilling losses following improved rigs utilisation, and (ii) marginally narrowed E&P losses, following last quarter’s transaction-related costs. However, this was offset by: (i) poorer E&C, given lower margin mix with newer jobs coming in at earlier project lifecycles, hence leading to frontloading of costs recognition.

More new contract wins of ~RM774m. SAPNRG had also announced a series of contract wins with a combined value of RM774m. These include (i) EPCI works for the Salman Project in Brunei, (ii) procurement, construction, hook up and commissioning works for Petronas Carigali, and (iii) three new drilling contracts in Thailand, Malaysia, and Brunei (refer to table below for detailed breakdown of new contract wins). Overall, we are positive on the new wins, as they display SAPNRG’s continued job winning and delivering capabilities. This brings YTD-wins to RM3.1b (still within FY20E replenishment assumption of RM5b), and order-book of RM16.3b. Post-contract win, this would bring all 9 of its operational rigs to have a contract on hand and be utilised by end of the year, as compared to currently only 6 being utilised. Meanwhile, 7 other rigs remain stacked.

Source: Kenanga Research - 30 Sept 2019