INVESTMENT HIGHLIGHTS

• Sapura Energy secured contracts worth RM1.3b

• Contracts won for its drilling and E&C segments

• Contracts are for the Malaysian waters, Indonesia, Gulf of Suez and Australia

• Includes maiden contract for The Royal Australian Navy

• Earnings estimates for FY20-21F maintained

• Maintain Neutral with an unchanged TP of RM0.34

Secured contracts worth RM1.3b. Sapura Energy Bhd’s (SEB) announced that it has secured several contracts and contract extensions worth approximately RM1.3b. The contracts secured are for its drilling as well as; engineering and construction (E&C) segments which brings its total contract wins for the current FY to roughly RM18.5b (from RM17.2b as of March 2019). The details of the contracts are as follows:

Drilling.

The segment managed to secure one (1) extension of its existing contract with PETRONAS Carigali and one (1) new drilling contract in Malaysia.

FY20-21F earnings maintained. We are maintaining both our FY20-21F earnings forecasts at this juncture as the new contract wins are within our orderbook replenishment assumption. That said, we are expecting more meaningful earnings to be recognized starting this FY due to the recent contract wins and pick-up in activity levels for both its E&C and drilling segment which is slated to begin from FY20 onwards.

Reiterate NEUTRAL. Despite the crude oil price currently in an upward trend breaching the USD70pb level, we remain wary on Sapura Energy’s earnings prospect as we foresee that its profitability will remain weak in the near term. The expected weak earnings prospect is mainly due to its drilling segment which is currently struggling to remain afloat and has yet to break-even as of 4QFY19. This, we opine is further exacerbated by the margin compression currently experienced by its E&C segment. Furthermore, with the recent sale of 50% stake in Sapura Upstream, contribution from its Exploration & Production (E&P) segment has now been reduced significantly. That said, we remain positive on SEB’s increasing orderbook replenishments; interest savings from paring down its borrowings as well as; the expected pick-up in activity levels for both its E&C and drilling segments. Furthermore, we are expecting to see a ramp-up in its activity levels as early as 1QCY19 as EPCIC contract works begin and yard utilisation will increase to 40% in 4QFY19 (from 10% currently) with more meaningful revenue recognition expected from 2QFY20 onwards. Yard utilisation is also expected to gradually increase to 80% with more works undertaken in the next six months. As such, we are reiterating our Neutral call on Sapura Energy with an unchanged TP of RM0.34 per share. Key rerating catalyst for Sapura Energy would be: (i) break-even of its drilling segment; (ii) improved margin for E&C segment as well as; (iii) better management of OPEX.

Source: MIDF Research - 15 Apr 2019