This article first appeared in The Edge Financial Daily on December 11, 2017

Sapura Energy Bhd
(Dec 8, 83 sen)
Downgrade to sell with a lower target price of 73 sen: We downgrade Sapura Energy to a “sell” as we foresee the group continuing to record losses. We also see potential risk of impairment in fourth quarter of financial year 2018 (4QFY18). Operationally, the engineering and construction (E&C), and drilling divisions will likely continue to see challenges in terms of fewer activities.

To make matters worse, annual depreciation and finance costs remain high to the extent that operating cash flow was only sufficient to cover interest payments in nine month (9MFY18).

Sapura Energy booked a headline net loss of RM274.4 million in 3QFY18. After excluding the unrealised foreign exchange gain of RM33 million and disposal loss on Sapura 3000 amounting to RM46 million, core losses narrowed slightly to RM261.3 million.

The disappointing results can be attributed to a few reasons: i) revenue at the E&C and drilling segments declined by 48% and 45%, respectively, ii) which affected margins (-3.2 percentage points decline in earnings before interest, taxes, depreciation and amortisation margin), iii) share of associate/joint venture profit fell 70% mainly due to SapuraAcergy recording a RM15 million operating loss, and iv) a higher tax charge despite posting a loss.

Exploration and production was the only division which saw an improvement as it benefited from a higher lifting volume (0.9mmboe in 3QFY18 vs 0.8mmboe in 3QFY17) and a realised lifting price of US$58 (RM237.22)/bbl in 3QFY18 versus US$45/bbl in 3QFY17. The current outstanding order book remains unchanged quarter-on-quarter at RM15.1 billion. Meanwhile, the gearing level continued to balloon from 1.18 times in 2QFY18 to 1.26 times in 3QFY18.

We slash our FY18-FY19 earnings forecasts from profits to losses to reflect the challenging environment for both the E&C and drilling divisions. We also cut our earlier FY20 profit forecast by 93%. — Affin Hwang Capital Research, Dec 8