9MFY20 losses missed expectations, dragged by poorerthan-expected E&C and drilling segments. Post-results, we extended our losses assumptions to FY20-21E. Meanwhile, the company also won contracts/extensions worth RM615m, bringing FYTD-win to RM3.7b and order-book to RM15.1b. Maintain OP and TP of RM0.33 (pegged to 0.4x PBV) with the stock now trading at deep discounts of merely 0.3x PBV.

9MFY20 below expectations. 9MFY20 registered core loss of RM377.5m (arrived after stripping-off non-core items e.g. gains on disposals and forex). Despite narrowed losses YoY, the results still came below expectations, exceeding our full-year loss forecasts of RM198.6m and consensus of RM219.5m. The poorer results were due to weaker-than-expected engineering and construction (E&C), and drilling segments. No dividends were announced, as expected.

Results review. Cumulatively, 9MFY20 narrowed losses were mainly helped by its E&C segment, due to higher earnings recognition from job progressions earlier in the year. This largely offsets the lower contributions from exploration and production (E&P) post 50% stake disposal to OMV AG in end-FY19. Meanwhile, bottom-line was also helped by the lower finance and depreciation costs following the rights issue and impairment exercises concluded in FY19.

However, for 3QFY20, core loss widened YoY, dragged by poorer performance from across all its segments; (i) poorer E&C, despite surge in revenue, due to frontloaded costs recognition for newer jobs, (ii) widened drilling losses, due to lower number of rigs utilised (5 vs. 7), and (iii) weaker E&P post 50% stake disposal. Sequentially, losses were also wider marginally, dragged by poorer E&C (similarly due to higher cost recognition) and higher drilling losses (5 vs. 6 rigs utilised).

Announced RM615m worth of new contracts/extensions. These include: (i) EPCC+I for Full Field Development Phase 3 Facilities, North Malay Basin by Hess Exploration and Production Malaysia B.V., (ii) subsea installation vessel from Mozambique Rovuma Venture S.p.A., (iii) extension of pipe laying vessel “Sapura Topazio” contract from Petrobras, and (iv) extension for semi-submersible tender assist drilling rig “Sapura Esperanza” with Sawarwak/Sabah Shell. Overall, we are positive as this displays the company’s continued capabilities in winning contracts. This brings FYTD-wins to RM3.7b (still within FY20E replenishment assumption of RM5b), and order-book to RM15.1b.

Maintain OUTPERFORM, and TP of RM0.33, pegged to 0.4x FY20E PBV. Post-results, we have widened FY20E losses by more than double, while also forecasting losses for FY21E of RM264m (versus prior profit forecast of RM84.1m) as we lowered our contribution assumptions for its E&C and drilling segments. Despite the uncertainty in its earnings turnaround delivery, our OP call is premised on the stock currently trading at floor valuations of merely 0.3x and below its rights issue price of RM0.30. That said, we believe a turnaround is a longerterm eventuality, with all the fundamental building blocks now gradually being put in place, as (i) strong order-book backed by further job wins, (ii) finance and depreciation expenses are much more palatable postrights and impairments exercises, (iii) gradual increase in drilling rigs utilisation, and (iv) first gas from SK408 by end-FY20 to boost E&P segment. Risks to our call include: (i) lower-than-expected contract replenishment, (ii) costs overrun, (iii) lower-than-expected drilling rigs utilisation, (iv) lower-than-expected E&P production volumes, and (v) poorer-than-expected operating margins.

Source: Kenanga Research - 6 Dec 2019