• Sapura Energy Berhad (SEB) 4QFY17 earnings fell back into the red at -RM172.3m

• Overall normalised FY17 earnings surprised on the upside at RM422m

• Total RM282.7m worth of impairments on assets booked in 4QFY17

• Offshore drilling vessel utilisation rate expected to remain under pressure in FY18

• Outstanding orderbook at RM16.7b

• Maintain NEUTRAL with unchanged TP of RM1.71

Overall reported earnings boosted by JV cos. SEB’s 4QFY17 earnings sank into the red at –RM172.3m as revenue declined by - 18.8% to RM1.8b and impairments on assets of RM282.7m was booked in the final quarter. Excluding the impairment charges and forex gains, SEB’s full year FY17 normalised earnings would have been RM422m, largely supported by the company’s JV ventures. Despite this, overall earnings failed to match our and consensus earnings forecasts.

Engineering & Construction. In line with lower segment revenue of RM4.5b (-19.5%yoy), segment PBT excluding impairments of RM123m sank by -48.7%yoy to RM558m. The lower numbers were largely due to lower activity levels, offset by higher contribution of JV companies.

Drilling. The Drilling segment has been largely hit by low utilisation rates. Segment revenue for the year declined by -31.7%yoy to RM2.0b. Excluding impairments of RM160.9m made for the segment, normalised PBT would have been RM239.3m, representing a decline of -61.6%yoy. The year-end utilisation rate for its drilling assets was 50%. For FY18, the fleet utilisation rate could possibly be lower.

Energy. Segment revenue for the financial year also did not fare well, declining by close to -30%yoy to RM1.1b, but segment PBT excluding exceptional items managed to grow by +10.8%yoy to RM128.6m. A total 4.1mmboe of crude was lifted at an average price of USD46pb in FY17 while the EBITDA breakeven ranged between USD30-35pb.

Orderbook update. Approximately RM5.5b worth of jobs has been secured for year-to-date CY17 and RM433.6m for FY18. Current total orderbook stands at approximately RM16.7b (after excluding Berantai RSC’s portion). RM5.5b of the orderbook is to be recognised in FY18 and the remaining RM11.2b to be recognised in FY19 and beyond.

Impact on earnings. Based on the latest financial announcement indicating that SEB’s joint ventures (Sapura Acergy, Brazilian contracts and other JV ventures) are contributing in an increasingly significant way, we are increasing our FY18 and FY19 earnings forecasts to RM236.4m and RM258.0m respectively. Although we remain cautious on the company’s orderbook replenishments and recognitions throughout FY18 and FY19, we do not discount the possibility of further increase in earnings estimates.

Fundamentals intact. With a current cash hoard of around RM3.5b, net gearing level of around 1.15x and potential remaining cash injection of around USD63m from the cessation of Berantai RSC by June 2017, we believe that the group will be able to weather the tough operating environment whilst seeking for more opportunities.

Maintain Neutral. At this current juncture, we are still recommending a NEUTRAL stance on SEB with an unchanged TP of RM1.71 per share (FY18PBR of 0.7x). As such, with oil price showing positive upward trajectory above USD50pb and company fundamentals improving quarter-over-quarter, we posit that there could be trading opportunities with the stock and investors could benefit from the volatile price movements.

Source: MIDF Research - 3 Apr 2017