Despite the reported net profit of RM17.2m, after stripping- off non-recurring and unusual items, 3QFY21 actually posted core net loss of RM127.8m, dragged by poorer E&C and drilling segments. Maintain UP with TP of RM0.05, flagging possible impairment risks and uncertainty in earnings.

9MFY21 deemed broadly within expectations. SAPNRG reported 3QFY21 headline net profit of RM17.2m. However, during the analysts’ briefing, we gathered that this number includes: (i) RM50m additional consideration arising from its previous 50% disposal of its exploration and production (E&P) arm to OMV, after certain conditions were met, (ii) an atypical RM70m technical services fees earned from its JV which was consolidated, and (iii) RM31m one-off accounting income following the winding-up of Sapura Acergy, recognised in its “associates and JV”- line. Stripping-off all the aforementioned unusual items, and a net forex loss of RM6m, 3QFY21 arrived at a core net loss of RM127.8m – bringing cumulative-9MFY21 to core net loss of RM124.2m. This is deemed broadly in line with expectations, coming in at 77% and 81% of our and consensus full-year loss forecasts, respectively. No dividends were announced, as expected.

Poorer E&C and drilling. Sequentially, 3QFY21 dropped to core loss, from core profit of RM23m in 2QFY21. Its engineering and construction (E&C) segment saw declined profits, given poorer project margin mix. Meanwhile, its drilling segment also widened its losses, given lower rig utilisation (6 rigs vs. 7 last quarter). Nonetheless, this was slightly offset by higher contributions from E&P, which benefitted from higher net lifting volumes during the quarter (2.9 mmboe vs. 2.8 mmboe last quarter), coupled with a reduction of deferred tax liability.

Cumulatively for 9MF21, group’s core losses narrowed 67% YoY. This was mainly driven by its E&C segment, which managed to see margin improvements given its costs optimisation efforts, coupled with marginally lowered losses for its drilling segment. This was partially offset by poorer E&P following the oil price weakness during the year.

Outlook still remains challenging. Overall, despite signs of a slow and gradual recovery, the group maintains that market outlook still remains uncertain and challenging at the moment. Global spend on engineering, procurement, construction and installation (EPCI) jobs are expected to be even lower in 2021 as compared to 2020, which may dampen its prospects of order-book growth. For now, revenue for FY21- 22 will be buoyed by its secured order-book of RM12.5b. Meanwhile, its refinancing exercise is expected to be concluded by end-January 2021, which will lengthen its borrowings profile by an additional seven years. We are relieved by this, as this would at least alleviate immediate borrowings-related uncertainties for the time being.

Impending impairments? Following the oil downturn this year, most of the oil and gas names under our universe have recognised impairments in the aftermath. However, YTD, SAPNRG has still yet to recognise any impairment so far, which leads us to speculate of possible balance sheet and impairments risks going into the last quarter of FY21.

Maintain UNDERPERFORM, with unchanged TP of RM0.05, pegged to 0.1x PBV. No changes on our FY21-22E numbers. Our call is premised on: (i) balance sheet and impairment risks, and (ii) short-term earnings uncertainty.

Risks to our call include: (i) better-than-expected recognition of order- book and project execution margins, and (ii) huge improvements in cash flow and balance sheet.

Source: Kenanga Research - 22 Dec 2020