INVESTMENT HIGHLIGHTS

• Sapura Energy 4QFY18 losses at –RM2.3b

• Impairments made on drilling rigs amounting to –RM2.1b

• No major impairments expected in FY19

• Total borrowings declined -11.8%yoy to RM16.4b

• Operating cash flow sufficient to sustain capex and debt repayments

• Maintain Trading Buy with unchanged TP of RM1.01

Impairments on drilling rigs. Sapura Energy’s 4QFY18 reported losses amounted to –RM2.3b. This is largely attributable to impairment charges made on its drilling rigs amounting to –RM2.1b. Excluding the impairment charges and unrealised forex losses, normalised LATAMI is at approximately –RM243m, well within our and consensus expectations on full year FY18 losses.

Engineering & Construction. Segment revenue and profit declined by -12.9%yoy and -55.3%yoy respectively. The lower revenue is attributable to lower activity levels while lower profit is due to various impairment charges on PPE and loss on disposals. New contract wins for the year at approximately RM3b.

Drilling. While segment revenue nearly halved to RM1.1b, the segment swung into losses largely due to impairment charges on the rigs amounting to nearly RM2.1b. Current vessel utilisation rate is at approximately 33% (five vessels in operations) with technical utilisation (uptime) of 99%. Moving forward, vessel utilisation rate is expected to remain for the five operational rigs.

Exploration and Production. This segment is still profitable largely owing to upbeat global crude oil prices and aggressive efforts made into this segment. Higher quarterly revenue is attributable to higher barrels of oil lifted and higher average selling prices (average USD57pb) while lower profit is due to impairment charges made during the quarter. 3.5mmboe was lifted in FY18 compared to 4.2mmboe in FY17.

Borrowings declined. Total group borrowings declined by - 11.8%yoy to RM16.4b from RM18.6b. Current net gearing spiked to 1.55x (previously 1.1x) as a result of the decline in asset base from RM37.4b to RM30.0b – largely due to aggressive asset impairments. Moving forward, no major asset impairments are expected.

Cash flow. The group’s operating cash flow is sufficient to finance its debt principal repayments and capex requirements for the group’s gas field developments. Hence, there is no need for cash calls or any other fund raising activities in the near term.

Orderbook. The group’s orderbook currently stands at RM16.6b, marking an inflection from FY18 low for the past four years. Out of these, approximately RM5.6b and RM3.1b are expected to be recognised in CY18 and CY19 respectively. The company’s bidbook is at USD13b.

Forward earnings expected to improve. Despite the massive reported losses, mainly from the drilling rigs segment, we do not expect further impairments of such scale in the foreseeable future. For FY19F, we are expecting the group to return to the black. The chunk of the group earnings will stem from the upbeat offshore activity levels of the E&C segment and sustainably higher crude oil prices of the E&P segment.

Changes no earnings. No change to earnings estimates as we believe FY19 will be a turnaround year.

Maintain Trading Buy. Year-to-date, Sapura Energy’s share price has declined by approximately -25%ytd. This is despite stable crude oil prices in the tight range of USD60-70pb. We are of the opinion that the current broad-market sell off presents trading opportunities for investors seeking exposure in oil and gas service providers with direct upstream exposure. Although we acknowledge that Sapura Energy’s profitability might still be weak due to its other underperforming segment, we believe that the share offers short term trading opportunities for investors. As such, we are maintaining our Trading Buy call on Sapura Energy with an unchanged TP of RM1.01 per share.

Source: MIDF Research - 29 Mar 2018