This article first appeared in The Edge Financial Daily on October 2, 2018

Sapura Energy Bhd
(Oct 1, 42.5 sen)
Maintain hold with a target price of 34 sen: Sapura Energy Bhd’s second quarter of the financial year ending Jan 31, 2019 (2QFY19) core loss comprised 167%/181% of our/consensus full-year loss forecasts, though the market had generally expected FY19 to be a challenging year for the group’s earnings. This stripped out RM37 million in net foreign exchange gains. The deviation came from the engineering and construction (E&C) division which recorded a loss on a decline in asset utilisation in 2QFY19, as the new engineering, procurement, construction, installation and commissioning projects are still in the initial procurement phase. Within rigs, losses were similar quarter-on-quarter (q-o-q) as the group recorded SKD Berani’s reactivation costs, even though operationally, rig utilisation had improved from the low of four rigs in 1QFY19 to six rigs in 2QFY19 out of its 15-rig fleet. The energy segment’s profit was a performer as it rose in 2QFY19 on a higher realised price of US$77 (RM318.78)/bbl (1QFY19: US$70/bbl; 2QFY18: US$51/bbl). As for its balance sheet, net gearing rose from 1.6 times to 1.7 times q-o-q, while its cash balance declined from RM1.4 billion in 1QFY19 to RM994 million in 2QFY19 due to loan repayments, a surge in working capital (receivables) for E&C and capital expenditure of close to RM400 million incurred mainly for SK408 gas.

Its order book increased to RM16.9 billion in 2QFY19, versus RM16.6 billion in 1QFY19. This included the RM5.3 billion jobs secured year to date. The order book recognitions for the second half of FY19 (2HFY19)/FY20 are at RM4.3 billion/RM4.6 billion, which include the Brazilian Pipe Laying Support Vessel joint-venture contract recognitions of RM1.4 billion/RM1.6 billion respectively. One quarter ago, the previous order book guidances for the first nine months of FY19/FY20 were at RM5.6 billion/RM3.1 billion. Assuming no new contracts, the implied revenue for FY19 is RM5.5 billion (which meets our forecast), while that for FY20 would be RM4 billion (versus our previous forecast of RM6.6 billion).

Sapura Energy is bidding for US$8 billion tenders worldwide, with US$10 billion more under prospective bids.

Permodalan Nasional Bhd (PNB) is undertaking the subscription for both its portion and any excess shares from the RM3 billion rights issue exercise with warrants, while also subscribing to the entire RM1 billion Islamic redeemable convertible preference shares (RCPS). PNB’s holdings may increase from 12.2% to 40% (up to 48% if the RCPS are included). Sapura Technology’s stake may be diluted from 15.9% to 12%. There is now higher certainty for the exercise to be completed by end-2018. The 50% energy divestment to OMV Group is also on track for end-2018 completion at an enterprise value valuation of US$1.6 billion. This may likely reflect a gain on disposal in end-FY19 results.

We anticipate 2HFY19 to see narrowed losses, based on the group’s order book disclosure. Rig utilisation is expected to be stable at six rigs (SKD Berani to replace the expiring SKD T-17). For E&C, we had originally expected higher straight-line revenue recognition from the procurement phase, due to Sapura Energy’s role as a turnkey contractor. With the current guidance of backloaded revenue recognition (illustrated below), we now expect revenue from new E&C projects to ramp up upon progress into the construction phase from 3QFY19. For the case of the RM2 billion Pegaga project, we have conservatively assumed a pickup in revenue from 4QFY19 due to its size and complexity. — UOB Kay Hian, Oct 1