KEY INVESTMENT HIGHLIGHTS

• Sapura Energy bagged RM840.0m worth of new contracts and contract extensions

• Contracts won were for both its Engineering & Construction as well as; Drilling segments

• Contract wins include a re-entry to a drilling campaign in Ivory Coast

• Cumulative contract wins to-date amounts to RM1,606.0m

• FY21-22F earnings revised upward to RM63.5m and RM100.8m respectively as better margins anticipated for E&C segment

• Upgrade to BUY with a revised TP of RM0.14 per share

Second round of contract wins for FY21. Sapura Energy Bhd (SEB) announced that it has secured an RM840.0m worth of new contracts and contract extensions via its wholly-owned subsidiaries and joint-venture companies. This brings its total contract wins to-date to RM1,606.0m. The contracts won are for both its engineering and construction (E&C) as well as; drilling segments. Out of the three (3) contracts won, two (2) are for projects located in South America while the remaining contract is for a drilling campaign located in Ivory Coast.

Engineering & Construction. The segment managed to secure one (1) new contract and one (1) extension to its existing projects located both in Mexico and Brazil respectively. 

Drilling. The segment managed to secure a new contract in Ivory Coast for Foxtrot International LDC. It is worth noting that the contract marks SEB’s re-entry into Ivory Coast. Recall that, SEB’s drilling arm provided the provision of similar type of services for Foxtrot International LDC’s drilling campaign back in 2015-16.

Orderbook update. Inclusive of this recent contract wins of RM840.0m, SEB has managed to secure a total of RM1,606.0m worth of contracts in FY21. Hence, we anticipate that the group’s latest total orderbook to-date to amount to roughly about RM14.5b. Recall that, the group’s orderbook as of June 2020 stood at RM14.0b (from RM13.5b in April 2020). Out of these, approximately RM5.7b is expected to be recognised in FY21, RM3.7b in FY22 and RM4.6b from FY23 onwards respectively. The company’s bidbook remains healthy at a total of RM74.0b for its E&C segment where 33% of the tenders are located in the Middle East, 29% in Asia, 28% in Europe and Africa and the remaining in Americas.

2QFY21 to register another positive financial performance. SEB is expected to announce its 2QFY21 financial results this afternoon, 18 September 2020. Following that, we expect that it will register another positive financial performance and will record an earnings similar to that of its 1QFY21. For 2QFY21, we anticipate SEB’s earnings to come in between RM15.0-20.0m given that the peak of the Covid-19 outbreak has passed and economies around the world have slowly eased movement and business restrictions during the quarter. Additionally, we are expecting E&C segment to show better contributions given its overall improving margins.

FY21-22F earnings revised. Following the new contract wins and the expectation of another positive quarterly results, we are revising upward our FY21-22F earnings forecasts by +16.5% and +25.1% respectively to RM63.5m and RM100.8m respectively as we input better EBIT margins for its E&C projects (from 10.0% to 10.5% in FY21 and from 10.0% to 11.0% in FY22).

Upgrade to BUY with a revised TP of RM0.14. Post earnings revision and ahead of its 2QFY21 earnings announcement, we are upgrading our recommendation on SEB to BUY (from Trading Buy previously) with a higher target price of RM0.14 (from RM0.113 previously). We have turned more positive on SEB given that operating environment worldwide have improved since April and we are anticipating better margins to accompany its recent contract wins which will assist in lifting its earnings going forward. Furthermore, we believe that earnings will be lifted in FY22 in-line with the gradual ramp up in E&C project execution milestones in FY21 and stable number of rigs in operation (~6-7 rigs per quarter) which will negate the impact of the compressed margins and competitive charter rates for its drilling segment.

Additionally, we opine that SEB’s current share price presents a good buying opportunity given that: (i) oil price is expected to remain stable throughout the year between the USD40-45pb level which will benefit SEB’s E&P segment; (ii) it is well-positioned to potentially win more contracts given its width and depth of expertise in providing various oil and gasrelated services and; (iii) it is currently trading at an attractive PER of 11.9x which is below its -1SD 5year average PER.

Source: MIDF Research - 18 Sept 2020