This article first appeared in The Edge Financial Daily on February 20, 2018

Sapura Energy Bhd
(Feb 19, 72 sen)
Maintain hold call with a lower target price of 67 sen: To recap, Sapura Energy Bhd’s nine months of financial year 2018 (9MFY18) bottom line swung to losses due to weak engineering and construction (E&C) and low rig utilisation of its drilling division. The weak results were partially offset by a stronger performance of the energy division due to higher average lifting oil prices and higher production volume.

The latest order book (including the joint venture-level order book) is about RM16 billion and about RM1.2 billion is expected to be recognised in the fourth quarter of financial year 2018 (4QFY18). As a result, FY18 E&C revenue is forecast to be about RM4.5 billion and remain flattish year-on-year. Its tender book currently stands at about US$9.5 billion (RM36.96 billion) with about US$5 billion tenders in late-stage bidding. Sapura Energy is expanding its footprint to the Middle East and Africa to improve contract-bidding prospects.

Its rig utilisation rate was at an all-time low of 33% in 3QFY18, and is expected to improve once SKD Alliance commences its new contract on April 18, 2018. Prospects for this division still remain challenging due to an oversupply of rigs, which we do not foresee will improve significantly in the near term.

Sapura Energy completed the field development of the B15 gas field in October 2017, and gas production will begin from 4QFY18. Development of SK408 is on track with the first gas for Gorek and Larak expected in 2020 to 2021. Potential monetising of the energy division is a major catalyst for Sapura Energy in the near term.

We cut our FY18 to FY20 earnings forecasts — from profits to losses — after taking into account a stronger ringgit exchange rate, lower order book replenishment and lower drilling rig utilisation rate assumptions.

Execution risks include a prolonged low oil price and delays in contract awards.

Near-term headwinds persist for the group with a gap still to be closed to maintain its revenue base. A weak rate outlook for the tender rig division and margins for the E&C segment have weighed on the company’s earnings outlook. We do not foresee this to improve significantly in the near term. Nevertheless, the company is a direct beneficiary of the current improving oil price as a major integrated oilfield service provider.

Our valuation methodology is now switched to the price per net tangible asset (P/NTA) from the price-booking value due to the possibility of impairment for Sapura Energy drilling assets. Our assumption of one times P/NTA multiple is pegged at FY19 NTA. — Hong Leong Investment Bank Research, Feb 19