KEY INVESTMENT HIGHLIGHTS

• Sapura Energy’s 3QFY20 normalised loss expanded by +50.1% year-over-year to -RM119.8m

• Revenue grew by +47.4%yoy driven by higher E&C segment’s revenue recognition

• Cumulative contract wins of RM3.7b year-to-date

• Orderbook remains robust at RM15.1b

• FY20-21F earnings revised down to –RM230.6m and RM68.8m respectively

• Maintain NEUTRAL with a revised TP of RM0.28 per share

Quarterly losses expanded yoy despite higher revenue recognition. Sapura Energy Bhd’s (SEB) 3QFY20 normalised loss expanded year-over-year by +50.1% to -RM119.8m from –RM79.6m loss recorded in 3QFY19. This was despite its revenue surging by +47.4%yoy - mainly due to higher revenue recognition from its E&C segment. The loss was primarily attributable to lower margins recognised on its E&C projects given that most projects are currently at the initial stage of development. This also brings its cumulative 9MY20 normalised losses to –RM377.5m (vs –RM368.7m in 9MFY19) which is below our and consensus’ full-year FY20 earnings estimates.

Engineering & Construction. Segment revenue and operating profit surged by 65.9%yoy and +59.4%yoy to RM1.6b and RM16.1m respectively. The higher revenue is attributable to higher activity levels during the quarter as the group begins to ramp up on its contract execution. However, the segment suffers from margin compression given that most of its projects currently are on the initial stage of execution. This naturally involves a high upfront capital spending and procurements related to the projects which offsets the revenue recognition.

Drilling. Segment revenue dipped by -24.6%yoy to RM185.9m due to lower number of working days vs 3QFY19 while waiting for new contract commencements. Correspondingly, the segment’s losses has also expanded by >100%yoy to –RM48.2m (from –RM11.7m in 3QFY19). An average of 5 rigs were in operations during the quarter – with technical utilisation (uptime) of 99%.

Exploration and Production. The segment recorded a profit before taxation of RM14.3m which is >100% higher than FY19 due to a one-off adjustment relating to the amount for depletion, depreciation and amortization arising from the strategic partnership with OMV AG.

Orderbook update. The group’s orderbook currently stands at RM15.1b. Out of these, approximately RM2.7b is expected to be recognised in FY20, RM5.6b in FY21 and RM6.8b from FY22 onwards respectively. The company’s bidbook is currently at USD8.1b with 32% of it located in the Middle East, 21% in Asia, 19% in Australia and the remaining in Africa, Americas and Europe. Meanwhile, its bid prospects currently stands at USD13.6b.

FY20-21F earnings revised. We are revising down our FY20-21F earnings forecasts to -RM230.6m and RM68.8m respectively. Despite expecting more meaningful earnings to be recognized due to the recent contract wins and pick-up in activity levels across its business segments from 2HFY20 onwards; we remain wary on the prolonged compressed margins and charter rates for both its E&C and drilling segments.

New contract wins worth RM615m announced. Along with the announcement of its 3QFY20 earnings, SEB also announced it has secured three (2) new contracts and two (2) contract extensions worth RM774m which brings its total contract wins to RM3.7b year-to-date. 

Maintain NEUTRAL with a revised TP of RM0.28. Post earnings revision and rolling forward our valuation base year to FY21, we are maintaining our NEUTRAL recommendation on SEB with a lower target price of RM0.28 (from RM0.30 previously). We opine that our recommendation is fair given that we anticipate profitability will remain a concern due to the continued margin compression experienced by its E&P segment as well as; competitive charter rates for its rigs. That said, we believe that earnings recovery will be gradual in-line with the ramp up in E&C project execution milestones and increase in number of rigs in operation (7-8 rigs in 2HFY20) which will negate the impact of the compressed margins and competitive charter rates. Furthermore, with the gas production from SK408 gas development project in Sarawak basin due for its first lifting in 4QFY20, we opine that it will positively impact SEB’s earnings going forward given that majority of the gases to be produced by the field has been sold to PETRONAS-operated Bintulu LNG complex.

Source: MIDF Research - 6 Dec 2019