Sapura Energy Bhd
(Dec 6, RM1.21)
Maintain hold with a lower target price of RM1.35: We maintain our “hold” recommendation on Sapura Energy Bhd as we do not foresee any improvement in its earnings prospect in the near term.
Although we expect the energy segment to be stronger in second half of financial year 2018 (2HFY18), it would not fully offset the losses from the drilling segment. As such, we cut our FY18/FY19/FY20 earnings by 46%/52%/14% respectively, as we believe the drilling segment would incur losses with six operational and 10 idle rigs from FY18 to FY19.
Although sentiment on oil and gas stocks is improving on the back of rising crude oil prices which benefits Sapura Energy’s energy segment, we believe the stock is unlikely to rerate in the near term until other segments deliver better earnings, particularly the drilling segment. We have imputed more conservative margin assumptions compared with consensus to reflect the competitive environment.
Following the recovery in oil prices, we expect more jobs to filter through in 2018 as the capital expenditure spending cycle in the industry has bottomed.
New tenders and contracts have improved during FY17, mainly driven by Pan Malaysia contract awards. We expect this growth momentum to continue in 2018 on more active bidding for new jobs in the market given the improved conditions. — AllianceDBS Research, Dec 6