INVESTMENT HIGHLIGHTS

• Sapura Energy Berhad’s (SEB) 3QFY18 earnings slipped into the red after two quarters of profit

• Recorded 9MFY18 normalised loss of -RM223.3m

• E&C segment loss making while losses from Drilling segment widening

• Cash pile shrinking at RM1.89b from RM3.5b

• Orderbook at RM15.b, tenderbook at RM5b

• Downgrade to HOLD with a revised TP of RM1.01

Earnings in the red. SEB’s 3QFY18 earnings slipped into the red at - RM274.4m, after two quarter of profit. The decline in earnings mainly stemmed from the steep decline in E&C revenue of -47.5% during the quarter. Excluding the loss on disposal of SapuraAcergy and net forex loss, the company’s 3QFY18 normalised earnings is at approximately - RM206.1m. Its cumulative 9MFY18 normalised losses (excluding loss on disposal of SapuraAcergy, net forex gain and other asset disposal gains) is at -RM223.3m. The losses come as a surprise as we have previously assumed the E&C segment to remain profitable.

Steep revenue decline in E&C segment. Segment revenue declined by -47.5%yoy to RM822.3m while losses before tax stood at - RM29.3m. The dismal segment results are due to lower activities during the quarter coupled with share of loss on disposal from SapuraAcergy amounting to -RM46.1m. Current yard utilisation rate is low at only 15% and is only expected to pick up by 2QFY19. Moving forward, approximately RM1.5b and RM3.5b worth of works from the E&C segment will be recognise for FY18 and FY19 respectively.

Drilling segment not faring well either. Segment revenue declined by -45.4%yoy while losses before tax continue to widen as the fleet utilisation rate remains low and under tremendous strain. Five rigs were operational during the quarter, representing a fleet utilisation rate of only 33%. Future demand for tender rigs regionally remains soft, albeit better compared with that of previous years. Moving forward, the fleet utilisation rate is expected to inch up to approximately 50%, representing seven or eight working vessels. This, we expect, will happen in the latter part of FY19.

Energy segment stable. The only stable business segment for the group is the Energy segment where revenue inched up by +5.7%yoy while 9MFY18 segment profit before tax sustaining at above RM50m. The commendable results are attributable to higher barrels of oil lifted and higher average selling prices achieved. For 3QFY18, 0.9mmboe were lifted with an average lifting price of USD58pb (EBITDA breakeven ranging between USD30-35pb). Contributions from B15 gas field is expected to accrue in a more meaningful manner in FY19 only.

Orderbook update. The current outstanding orderbook is at approximately RM15.1b. Contract wins year-to-date total RM2.8b, while tenderbook is currently at USD5b and prospects at USD4.5b. RM1.7b is expected to be recognised in FY18, RM4.3b in FY19 and the remaining portion from FY20 onwards.

Cash level worrying. With heavy capex spend (largely for B15) and debt-servicing obligations, SEB’s cash level has declined from RM3.52b (31 January 2017) to only RM1.89b currently. This has caused the net gearing ratio to register 1.26x, exceeding the company’s medium term target of 1.1x – a level that the company has religiously adhered to. However, the company reiterates its ability to fund future capex requirements and debt obligations.

Impact on earnings. At this juncture, it is reasonable to assume that the company will register a net loss for FY18. Any upside to earnings will most likely happen in FY19 when the new projects secured will be executed in a more meaningful manner, contributions from higher oil prices for the Energy segment and higher activity levels for the tender rigs. Therefore, we turn bearish on FY18, reducing our earnings forecasts to a loss of -RM235.2m while reducing our FY19 earnings estimates to RM105.1m.

Downgrade to NEUTRAL. While we note that the broader industry climate is improving with crude oil prices sustaining at levels above USD60pb, we opine that SEB’s dismal earnings will continue to weigh heavily on its share price. In addition, its heavy asset base and large interest payments on debts will also further exacerbate the downward pressure on its stock price. With investor sentiments turning unfavourable, we are downgrading our stance on SEB to NEUTRAL with a revised target price of RM1.01 per share. Our TP is based on the company’s expected net book value.

Source: MIDF Research - 8 Dec 2017