(Sept 26, 28.5 sen)

Maintain buy with a target price (TP) of 40 sen: We reiterate our “buy” call on Sapura Energy Bhd with an unchanged TP of 40 sen. We see room for improvement for the engineering and construction (E&C) market after a long period of inactivity, recovery in the drilling market and ramp-up of gas production for its energy division. This bodes well for Sapura Energy’s prospects for financial year 2021 (FY21) and FY22. Although the improvement would not be sufficient to overturn the projected loss for FY20, we believe most negatives have already been priced in with the stock trading at a distressed price-to-book ratio of 0.4 times at more than -1 standard deviation of its historical mean.

We are more conservative than the consensus and now expect Sapura Energy to register a loss for FY20 (from a net profit of RM90 million previously) as most E&C projects are in the start-up phase. For FY21 onwards, we are more bullish than the consensus as we expect a steeper recovery in industry trends. Other catalysts include an improvement in energy security requirements for Saudi Arabia. Following the drone attacks on the country’s oilfields, we see potential for it to ramp up production rates and build on its reserves.

Our sum of parts-based TP stands at 40 sen which assigns no value to the loss-making drilling segment, 7.5 times FY21 enterprise value over earnings before interest, taxes, depreciation and amortisation for the E&C segment and a discounted cash flow with a weighted average cost of capital of 7% for the energy segment.

Key risks to our view include a slow capital expenditure recovery. The recovery could be curtailed if oil prices plunge below US$60 (RM251.40) a barrel. This would affect adversely Sapura Energy’s earnings prospects due to slow roll-outs of contracts. — AllianceDBS Research, Sept 26