Sapura Energy’s (SAPE) 3Q19 results improved with losses narrowing significantly to RM31.1mil from RM274.4mil last year, on the back of operational improvements across the board. In a research report released this morning (7 Dec), Macquarie Equities Research (MQ Research) increased SAPE’s target price to RM0.550 and maintained Outperform on this stock.

Event

• SAPE announced 3Q19 results as well as RM1.5m in engineering and construction (E&C) contract wins.

Impact

• 3Q19 results showed operational improvements across the board.

• E&C: ramp-up in asset utilisation lifted revenues +23% quarter on quarter (QoQ), but margins remain soft. RM1.5bn ONGC contract win brings YTD contract wins to RM8.5bn and total orderbook to RM18.6bn with ~RM6bn to be recognised in FY20. Long-term agreement (LTA) with Saudi Aramco expands bid funnel via previously inaccessible Middle East jobs.

• Drilling: losses narrowed 80% to -RM11.7m following one-off commissioning costs in the previous quarter. The turnaround outlook is still slow, with only 7 rigs utilised; breakeven expected at 10 rigs.

• Exploration and production (E&P): A high crude lifting price (US$79/bbl average) boosted revenue/OP by +30/33% QoQ. MQ Research expects correction in 4Q18 in-line with lower oil prices.

• The cash position continued to deteriorate (3Q/2Q18: RM670/994m) due to rising working capital requirements as E&C projects ramp up, while billings lag. However, MQ Research does not expect any liquidity issues given the RM4bn cash call seems all but certain. Expect shares to trade ex-rights by late-Dec.

Earnings and Target Price Revision

• MQ Research upgrades FY20/21 adjusted net profit by +80%/+9% on higher E&C orderbook recognition. MQ Research raises SAPE’s target price by 6% to RM0.55.

Price Catalyst

• 12-month price target: RM0.55 based on a Sum of Parts methodology.

• Catalyst: Conclusion of corporate exercises.

Action and Recommendation

• Maintain Outperform, but expect the share price to trade range-bound until the cash call is completed (estimated: late Dec). A substantial short-position remains outstanding (~5% of share capital) that needs to be unwound (MQ Research expects ex-rights date will be the trigger event). While oil prices have fallen, MQ Research notes that SAPE has locked in the value of its E&P business (the most sensitive to oil prices) via the disposal to OMV, which MQ Research estimates is based on US$80/bbl LT price assumptions. MQ Research upgrades earnings and revenue on higher E&C orderbook recognition in FY20.

Source: Macquarie Research - 7 Dec 2018