• Sapura Energy Berhad’s (SEB) 1QFY18 earnings declined by -75.1%yoy to RM27.4m

• Drilling and E&P segments remain weak

• New wins of RM1.3b in FY18

• Outstanding orderbook stands at over RM17b

• Maintain NEUTRAL with unchanged TP of RM1.71

Low activities levels. SEB’s 1QFY18 earnings declined by -75.1%yoy to RM27.4m following a decline in group sales by -8.9%yoy to RM1.77b. 3MFY18 profit failed to keep pace with our and consensus full year estimates by a variance of more than -10%; our estimates being on the conservative end of the lot. The bulk of the declines in revenue and earnings are from the Drilling and E&P segments.

Engineering & Construction (E&C). Segment revenue and earnings increased by +17.4%yoy and +130%yoy respectively. These were a result of higher activity levels during the quarter. With the completion of some major projects however, yard utilisation rate is expected to be weak in subsequent quarters.

Drilling. SEB’s drilling segment revenue and earnings slumped by - 38.2%yoy and -86.3%yoy as rig utilisation remains low and operating environment remains challenging. There were seven rigs in operation in 1QFY18, representing a utilisation rate of 47% (Teknik Berkat scrapped). Utilisation rates for 2Q and 3Q could possibly be lower with only five vessels expected to be working. In addition, charter rates remain weak and continue to be on a general declining trend.

Exploration & Production (E&P). Despite segment revenue recording a decline of -34.6%yoy due to the cessation of the Berantai RSC, segment earnings maintained its profitability due to favourable crude oil prices. The average crude lifting price in 1QFY18 was USD52pb and we believe that the average lifting price will be lower in 2QFY18.

Orderbook update. Approximately RM1.3b worth of new jobs was secured in FY18. The current outstanding orderbook is at RM17b, where RM4.9b will be recognised in FY18, RM3.4b in FY19 and the remaining RM8.7b in FY20 onwards.

Impact on earnings. Despite the comparatively weak earnings, we are still maintaining our earnings estimates at this juncture as: (i) First quarter earnings do not fully reflect full year earnings potential and; (ii) the high tax incurred in 1QFY18 should normalised, registering mid-20s rate in the subsequent quarters.

Fundamentals intact. With a current cash hoard of around RM2.1b (approximately RM1.3b was used to pare down borrowings in February 2017), net gearing level maintaining at around 1.16x 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 company fundamentals improving quarterover-quarter and oil prices behaving erratically, we posit that there could be trading opportunities with the stock and investors could benefit from the volatile price movements.

Source: MIDF Research - 20 Jun 2017