Sapura Energy (SapE)’s FY20 results missed our and consensus expectations, widening its core losses to RM865.6m. This came after it reported a core loss of RM508.6m in 4QFY20, with the RM3.3bn impairments and additional provisions of RM439m stripped-out. Major setbacks were seen in its engineering and construction (E&C) earnings despite reporting a 50.4% YoY jump in revenue. With growing demand and supply imbalances due to the economic downturn as a result of Covid-19, SapE’s earnings are unlikely to turn around in the near term given the very challenging operating climate. Major headwinds will come from the deferment of projects based on clients’ requests, resulting in topline contracting ~15% in FY21 while profit margins for E&C and drilling will be hit due to lower utilization. We anticipate SapE’s FY21-23 earnings to remain in negative territory on account of the prolonged recovery expected in the industry. We downgrade our rating to Underperform on SapE at an adjusted TP of RM0.06 (from RM0.12 previously) based on FY21 SOP valuations.

• A kitchen-sinking quarter. The Group reported headline loss of RM4.2bn which was dragged by huge impairments of RM3.3bn, consisting of goodwill impairment of RM1.1bn for E&C, RM2bn for drilling and RM240.9m for PPE impairment (5 non-strategic vessels and ROVs as well as 1 aged rig). SapE also recorded an additional provision amounting to RM438.8m, arising from the re-assessment of projects due to Covid-19 global lockdowns and low oil prices which will delay executions. Stripping out these numbers, the Group still recorded a core loss of RM508.6m, bringing its cumulative FY20 core loss to RM865.6m, almost double our initial loss projection.

• Performance dragged by E&C. E&C division reported 4QFY20 revenue of RM859.7bn, decreasing by 31.8% YoY and 46.0% QoQ due to lower work volumes. In line with this, the Group reported a pre-tax loss of RM316m due to thin profit margins achieved as most projects are still in the initial procurement phases, leading to under-recovery of costs. Meanwhile, the drilling segment reported a small pre-tax profit of RM2m on the back of higher revenue (+1.3% YoY, +36.2% QoQ) in 4QFY20. The improvement was mainly due to higher rig utilization of 7 units versus 6 and 5 units in 4QFY19 and 3QFY20 respectively. SapE’s exploration and production (E&P) division reported a pre-tax loss RM78.8m which is believed to be due to extra cost incurred on the exploration well.

• Expecting the worst. In view of the challenging operating climate, we anticipate SapE’s FY21-23 earnings to remain in negative territory given the prolonged recovery expected in the industry. Despite its RM13.5bn order book in hand, we see major headwinds coming from the deferment of projects based on clients’ requests, resulting in topline contracting ~15% in FY21 while profit margins for E&C and drilling will be hit due to lower utilization. We are now expecting the Group to report a loss of RM612.4m in FY21 from a breakeven position previously, and remain in loss of RM408.0m and RM194.3m for FY22 and FY23 respectively. On a separate note, the Group highlighted that it is currently working on its RM10.2bn loan, to be restructured into a new loan with a tenure in between 5 - 10 years. SapE expects this to complete by this year, though we see this resulting in higher finance cost once it is completed.

Source: PublicInvest Research - 30 Apr 2020