KEY INVESTMENT HIGHLIGHTS

• Sapura Energy’s recorded its second consecutive quarterly profit for the FY21

• 2QFY20 earnings came in above expectations at RM23.7m despite -36.7% contraction in revenue year-over-year

• Earnings were boosted by healthy margins from E&C segment and leaner operations

• Orderbook remains robust and geographically well diversified at RM13.3b as of 18 September 2020

• FY21F earnings revised upward by +14.2% to RM72.5m

• Maintain BUY with a revised TP of RM0.16 per share

Second consecutive quarterly profit. Sapura Energy Bhd (SEB) reported its second consecutive quarterly net profit for the financial year of RM23.7m in 2QFY21. This brought its 1HFY21 cumulative earnings to RM37.9m, which was above ours and market full-year earnings expectations by +59.7% and >100% respectively. Recall that, in our latest report on SEB titled: More Contract Wins for FY21-22 dated 18 September 2020, we have anticipated that its 2QFY21 earnings would come in between RM15-20.0m. As expected, SEB’s earnings during the quarter were primarily driven by its Engineering and Construction (E&C) segment’s overall improving performance.

Earnings grew despite contraction in revenue year-over-year. When compared against 2QFY20, revenue in 2QFY21 was lower by - 36.7%yoy primarily attributable to lesser project activities from its E&C segment which was in line with the progress of its ongoing projects. That said, its earnings improved by >100%yoy following better margins from the E&C segment. Similarly, on a quarterly sequential basis, revenue was lower by -10.1%qoq whilst earnings surged +67.1%qoq attributable to the abovementioned reasons.

Engineering & Construction. Segment revenue dipped by -37.7%yoy attributable to lower activity levels during the quarter which was partly due to the progress of ongoing projects which are mostly in early stages. That said, the segment’s operating profit surged by >700.0%yoy due to partly better margins recognised from the ongoing projects. We understand that, the segment’s improved performance year-over-year were also attributable to positive outcome from various negotiations with its clients with regards to: (i) change and variation orders as well as; (ii) revision and extension of project timeframes due to the Covid19 pandemic. Furthermore, the segment also benefitted from the ongoing cost optimization initiatives that have been undertaken since early this FY. Consequently, segment’s operating profit margin also jumped to 21.1% in 2QFY21 vs only 1.6% in 2QFY20 and 10.6% in 1QFY21. Meanwhile, on a quarterly sequential basis, segment revenue declined by -11.4%qoq whilst operating profit grew by +17.0%qoq.

Drilling. Segment revenue contracted by -31.1%yoy at RM187.4m due to lower number of operating days for working rigs during the quarter. An average of 7 rigs was in operation during the quarter with technical utilization (uptime) of 99.9%. Consequently, the segment recorded a widening operating loss of -RM32.4m in 2QFY21 vs -RM14.9m 1QFY21.

Exploration and Production. The segment recorded a widening loss before taxation of -RM53.6m during the quarter vs -RM5.8m in 2QFY20. During the quarter, the segment reported higher production output of 2.8Mmboe following the startup of its SK408 Larak, Gorek and Bakong gas fields. This was as oppose to only 1.4Mmboe lifted in 2QFY20. That said, the higher output was offset by lower lifting price which only averaged at USD36.6/bbl vs USD70.6/bbl in 2QFY20.

Orderbook update. The group’s orderbook currently stands at RM13.3b (from RM14.0b in June 2020). Out of these, approximately RM3.3b is expected to be recognised in FY21, RM5.1b in FY22 and RM4.9b from FY23 onwards respectively. Addionally, the company’s bid funnel remains healthy at a total of RM92.0b; a +25.0%qoq from RM74.0b in 1QFY21. 29% of the tenders are located in the Middle East, 25% in Other Asia, 15% from South East Asia, 14% in Europe and Africa, 13% in the Americas whilst the remaining 4% from Malaysia.

FY21F earnings revised, FY22F earnings maintained. Following the better-than-expected earnings, we are revising upward our FY21F earnings forecasts to RM72.5m. However, we are maintaining our FY22F earnings at this juncture as we believe that all positives have been priced in for FY22.

Maintain BUY with a revised TP of RM0.16. Post earnings revision, we are maintaining our BUY recommendation on SEB with a higher target price of RM0.16 (from RM0.14 previously). We opine that while volatility surrounding its operating environment remains persistent and exacerbated by the Covid-19 pandemic developments, we anticipate that SEB will be able to sustain its current quarterly profits into the 2HFY21. This is following the: (i) ongoing cost optimization initiatives; (ii) stable movement of the crude oil price which would sustain current and encourage future work orders and; (iii) margin expansion from its E&C segment.

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 which will negate the impact of the compressed margins and competitive charter rates plaguing its drilling segment. Additionally, we are also expecting better performance from its E&P segment as the recent recovery in oil price would result in higher lifting price for 3QFY21 and 4QFY21 respectively.

Additionally, we reiterate our view that SEB’s current share price presents a good opportunity to accumulate the shares 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 gas-related 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 - 21 Sept 2020