KEY INVESTMENT HIGHLIGHTS

• Sapura Energy’s recorded another quarterly profit for the FY21

• 3QFY21 earnings came in within expectations at RM17.5m despite -25.3% contraction in revenue year-over-year

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

• Orderbook remains robust and geographically welldiversified at RM12.5b as of 31 October 2020

• FY21-22F earnings maintained

• Maintain BUY with an unchanged TP of RM0.16 per share

Another quarterly profit as anticipated. Sapura Energy Bhd (SEB) reported its third consecutive quarterly net profit for the financial year in 3QFY21 with RM17.5m. This brings its 9MFY21 cumulative earnings to RM55.1m – which was within ours but above market’s full-year earnings expectations at 76% and >100% respectively. As we have previously highlighted, SEB’s earnings during the quarter were primarily driven by its Engineering and Construction (E&C) segment’s overall improving performance which saw the segment’s operating profit margin surging to 13.0% in 3QFY21 vs only 1.0% in 3QFY20.

Earnings grew despite contraction in revenue year-over-year. When compared against 3QFY20, revenue in 3QFY21 was lower by - 25.3%yoy primarily attributable to lesser project activities from its E&C segment which is 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 higher by +9.0%qoq due to higher contribution from the E&C segment. However, earnings contracted by -27.5%qoq attributable to higher tax expense during the quarter.

Engineering & Construction. Segment revenue dipped by -24.9%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 >800.0%yoy due to partly better margins recognised from the ongoing projects as well as; higher share of profit from joint ventures and associates. 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 13.0% in 3QFY21 vs only 1.0% in 3QFY20 and 10.6% in 1QFY21. Meanwhile, on a quarterly sequential basis, segment revenue grew by +15.8%qoq whilst operating profit grew by +28.5%qoq.

Drilling. Segment revenue contracted by -28.3%yoy at RM133.2m due to lower number of operating days for working rigs during the quarter. An average of 6 rigs was in operation during the quarter with technical utilization (uptime) of 99.9% - including Sapura Jaya rig which is currently idle after a force majeure was declared on it back in April. Consequently, the segment recorded a widening operating loss of -RM72.8m in 3QFY21 vs -RM48.2m 3QFY20.

Exploration and Production. The segment returned to the black with a profit before taxation of RM32.8m during the quarter vs -RM53.6m in 2QFY21. During the quarter, the segment reported its highest ever production output of 2.9Mmboe following the start-up of its SK408 Larak, Gorek and Bakong gas fields. This was as oppose to only 0.9Mmboe lifted in 3QFY20. That said, the higher output was offset by lower lifting price which only averaged at USD42.2/bbl vs USD65.2/bbl in 3QFY20.

Orderbook update. The group’s orderbook currently stands at RM12.5b (from RM13.3b in July 2020) with a cumulative contract wins of RM2.2b year-to-date. Out of these, approximately RM2.0b is expected to be recognised in FY21, RM5.5b in FY22 and RM5.0b from FY23 onwards respectively. Addionally, the company’s bid funnel remains healthy at a total of RM107.0b; a +16.3%qoq from RM92.0b in 2QFY21. Out of the RM107.0b bid funnel, RM38.3b of bids have been submitted and are currently in progress.

In terms of geographical distribution, 27% of the tenders in their bid funnel are located in the Middle East, 25% in Other Asia, 14% from South East Asia, 10% in Europe and Africa, 18% in the Americas whilst the remaining 6% from Malaysia. This we opine, addresses the concentration risk as well as; risk associated with specific regions. The bid funnel also incorporates SEB’s energy transition agenda whereby ~55% of its bid funnel are made up of gas development projects.

FY21-22F earnings maintained. We are making no changes to our FY21F earnings estimates as we opine that SEB is on track to meet our earnings projection. We are also maintaining our FY22F earnings at this juncture as we believe that all positives have been priced in for FY22.

Target price maintained at RM0.16. As we made no changes to our earnings for FY21-22F, we are also maintaining our target price at RM0.16 per share. Our target price is derived via a discounted cash flow (DCF) valuation model with a WACC of 7.6% and terminal growth of 3.1%.

Maintain BUY. Post earnings announcement, we are maintaining our BUY recommendation on SEB. 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 FY22. This is following the: (i) ongoing cost optimization initiatives which will stretch into FY22 – with an approximately RM500m to be realized during the FY; (ii) stable movement of the crude oil price which would sustain current and encourage future work orders and; (iii) sustained margin (12-13%) from its E&C segment.

We also believe that earnings to be lifted in FY22 in-line with the gradual ramp up in E&C project execution milestones which will negate the impact of the compressed margins and competitive charter rates plaguing its drilling segment. Furthermore, as the utilization rate of its yard is currently at 50%, we opine that the segment has plenty of room to undertake more work orders in the future which will bode well for its earnings trajectory going forward.

We are also expecting better performance from its E&P segment in FY22 as its SK408 and SK310 production sharing contract (PSC) for Gorek, Larak and Bakong are expected to remain stable with increasing production going forward. It will also benefit from the recent recovery in oil price would result in higher lifting price for 4QFY21 and FY22 respectively. Additionally, with the SK408 Jerun UGSA key terms have finally been agreed upon with Petronas, it will finally allow SEB to put in their final FID into the project. Hence, Management expects the Jerun CPP award to be out by February 2021 and this will contribute positively to the Group’s earnings in FY22.

All in, 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 CY21 between the USD48-53pb 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 - 22 Dec 2020