Sapura Energy (SapE)’s 9MFY20 results missed our and consensus expectations with cumulative 9M losses larger-than-anticipated. For 3QFY20, it reported a core net loss of RM119.8m (after stripping out some exceptional items amounting to RM18.9m), despite higher revenue of RM1.8bn. For cumulative 9MFY20, core net loss widened to RM356.9m though narrowing from its 9MFY19 core net loss of RM396.8m. The disappointments are attributed to i) weaker contribution from its Brazil projects, ii) low engineering and construction (E&C) margins, with projects largely still at early execution phases, and iii) lower utilization of drilling rigs. 4QFY20 earnings are unlikely to turn around, made worse by slower recovery in its E&C profit margins. We anticipate SapE’s FY21 earnings to be very much supported by its Exploration and Production (E&P) segment, likely to only break even or post a minimal profit. We widen our FY20 net loss expectations to RM446.3m (from RM141.1m) and cut our FY21/22 profit lower by an average of 53.9% to account for lower margins assumptions from E&C segment. Separately, the Group also announced that it has secured multiple contracts in various countries with a combined value of c. RM615m. We are positive on this as it will strengthen the Group’s orderbook profile and earnings visibility. We maintain our Outperform rating on SapE at an adjusted TP of RM0.30 (from RM0.39 previously) based on FY21 SOP valuations.

• Engineering & Construction (E&C) – much slower recovery. The division reported 3QFY20 revenue of RM1.6bn, increasing by 65.9% YoY due to higher work volumes, though slightly lower QoQ by 3.9%. Despite this, the Group only reported a pre-tax profit of RM16.1m, dropping by 59.4% YoY and 40.8% QoQ due to lower profit margins achieved in the quarter as most projects are still in the initial procurement phases hence costs being higher.

• Drilling – lower contribution in 3Q. The segment reported revenue of RM185.9m, decreasing from RM246.5m (-24.6% YoY) in 3QFY19 and RM272m (-31.7% QoQ) in 2QFY20. The decline was mainly due to lower rig utilization of 5 units versus 7 and 6 units in 3QFY19 and 2QFY20 respectively. As a result, the segment recorded a pre-tax loss of RM48.2m, widening from a loss of RM11.7m in 3QFY19 and RM35.7m in 2QFY20. Improvements should be seen in 4QFY20 as deployment of rigs will improve to 7, with the T-10 and Sapura Jaya rigs to re-commence works during the quarter for Petronas Carigali and Chevron in Angola.

• Exploration and Production (E&P) – FY21 earnings driver. At the pre-tax level, the E&P business reported a profit of RM14.3m in 3QFY20 as compared to a loss of RM5.8m in 2QFY20. The improvement was due to the reversal on some provision made in 1Q. Total production was lower at 0.8 mmboe versus 1.1 mmboe in 1Q and 1.4 mmboe in 2QFY20. Average crude lifting price was lower at USD68/bbl. Contributions from this segment will improve in FY21 onwards as the SK408 Phase 1 development for Gorek, Larak and Bakong fields are on track for first gas in late 2020.

• Earnings forecast. While SapE’s overall revenue is picking-up, profit margins especially for its E&C segment have yet to reach an optimal level of progress due to most of its projects valued at RM500m and above still being at engineering, procurement and fabrication stages. Utilization of offshore assets are only to follow upon maturing into the transportation and installation (T&I) stages, and subsequently the capturing of more favorable profit margins. As such, we reckon the Group’s recovery may take slightly longer than expected. We widen our FY20 net loss expectation to RM446.3m (from RM141.1m) and adjust our FY21/22 profit lower by an average of 53.9%.
• New contract wins. Separately, the Group also announced that it has secured multiple contracts in Brazil, Mozambique and Malaysia with a combined value of c. RM615m. The contracts comprise of i) 3 engineering and construction contracts in Brazil, Mozambique, and Malaysia and ii) 1 drilling contract in Malaysia. Contract lifespans are up to 2QFY22. Details of projects as per table 2.
• Orderbook remains strong at c. RM15.1bn. This marks the fourth set of contract wins in FY20, with cumulative value now at RM3.7bn to keep its outstanding orderbook healthy at c. RM15.1bn, and the Group busy over the next 3 years. The Group’s tender book remains strong at USD8.1bn presently with additional prospect of another USD13.6bn, growing from USD9.3bn in the previous quarter.

Source: PublicInvest Research - 6 Dec 2019