KEY INVESTMENT HIGHLIGHTS

• Sapura Energy’s 2QFY20 reported loss narrowed yoy to - RM116.6m

• Revenue grew by +86.7%yoy driven by higher E&C and drilling segments’ revenue recognition

• Cumulative contract wins of RM3.1b year-to-date

• Orderbook remains robust at RM16.3b

• FY20-21F earnings revised down by -38.8% and -34% respectively

• Maintain NEUTRAL with a revised TP of RM0.30 per share

Quarterly losses narrowed yoy with higher revenue recognition.

Sapura Energy Bhd’s (SEB) 2QFY20 reported loss narrowed to - RM116.6m from –RM125.9m loss in 2QFY19. This was primarily driven by higher revenue recognition during the quarter by +86.7%yoy largely attributable to both its engineering and construction (E&C) and drilling segments. This also brings its cumulative 1HFY20 normalised losses to – -RM225.9m (vs –RM262.5m in 1HFY19).

Engineering & Construction. Segment revenue and profit surged by >100%yoy to RM1.6b and RM27.0m respectively. The higher revenue is attributable to higher activity levels during the quarter as the group begins to ramp up on its contract execution and this wil

Drilling. Segment revenue was higher by +7.1%yoy at RM272.0m due to higher number of working rigs vs 2QFY19. The segment’s losses (eximpairments) has also narrowed by -39%yoy to –RM36m (from –RM58m in 2QFY19). An average of 6 rigs were in operations during the quarter with technical utilisation (uptime) of 99%.

Exploration and Production. 1.4mboe were lifted during the quarter which is higher from the 1.2mboe lifted in 2QFY19. That said, the average crude lifting price during the quarter was lower at USD71/bbl vs USD77/bbl back in 2QFY19.

Orderbook update. The group’s orderbook currently stands at RM16.3b. Out of these, approximately RM4.2b is expected to be recognised in FY20, RM5.3b in FY21 and RM6.8b from FY22 onwards respectively. Out of the RM6.9b to be recognised in FY20, about RM3.8b will be from its E&C segment. The company’s bidbook is currently at USD8.6b whilts its bid prospects currently stands at USD9.3b.

FY20-21F earnings revised. We are revising down our FY20-21F earnings forecasts by -38.8% and -34% respectively. Despite expecting more meaningful earnings to be recognized due to the recent contract wins and pick-up in activity levels across its business segments from 2HFY20 onwards; we remain wary on the prolonged compressed margins and charter rates for both its E&C and drilling segments.

Maintain NEUTRAL with a revised TP of RM0.30. Post earnings revision and rolling forward our valuation base year to FY21, we are maintaining our NEUTRAL recommendation on SEB with a lower target price of RM0.30 (from RM0.34 previously). We opine that our recommendation is fair given that we anticipate profitability will remain a concern due to the continued margin compression experienced by its E&P segment as well as; competitive charter rates for its rigs. That said, we believe that earnings recovery will be gradual in-line with the ramp up in E&C project execution milestones and increase in number of rigs in operation (7-8 rigs in 2HFY120) which will negate the impact of the compressed margins and competitive charter rates. Furthermore, with the gas production from SK408 gas development project in Sarawak basin due for its first lifting in 4QFY20, we opine that it will positively impact SEB’s earnings going forward given that majority of the gases to be produced by the field has been sold to PETRONAS-operated Bintulu LNG complex.

Source: MIDF Research - 30 Sept 2019