Analysts cut target prices on Sapura Energy despite returning to the black

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KUALA LUMPUR (March 26): Analysts have cut their twelve-month target prices on Sapura Energy Bhd despite the latter returning to the black in the fourth financial quarter ended Jan 31, 2019.

At 12pm, the stock fell 0.5 sen or 1.45% to 34 sen. It is among the most actively traded counters this morning with 71.57 million shares done.

Yesterday, the oil and gas giant said it posted a quarterly net profit of RM500.43 million compared to a net loss of RM2.29 billion a year ago.

During the quarter under review, the group booked in a RM1.41 billion impairment on its drilling, and engineering and construction (E&C) assets, plus a RM108.4 million impairment on goodwill in 4QFY19. However, a disposal gain of RM2.66 billion helped to offset the impairment.

In research notes by several houses today, analysts said the quarterly earnings missed consensus expectations, and as such have reviewed their target prices on Sapura Energy to reflect lower earnings forecasts moving forward.

RHB Research maintained its buy call on the stock with a lower target price of 45 sen, from 46 sen previously, while MIDF Research has downgraded it to neutral with a lower target price of 34 sen, from 60 sen previously.

CIMB Research has also downgraded from Sapura Energy from add to a hold call with a reduced target price of 37 sen, from 57 sen previously.

Moving forward, however, CIMB said it expects Sapura Energy's E&C division to do better overall in FY20.

"We are forecasting the E&C (excluding the Brazil PLSV business) pretax loss to drop materially in FY20, as SAPE (Sapura Energy) has already secured RM4.2 billion in E&C revenue for FY20 (vs. actual E&C revenue of RM3.7 billion for FY19), and additional contracts are possible (we have pencilled in an additional RM0.5 billion). As contracts reach execution stage, margins should increase," it said in a note today.

Furthermore, it said the tender drilling rig (TDR) recovery is gradually happening.

"We expect SAPE to deliver a small profit for the TDR arm in FY20, versus a loss in FY19, as we note a higher level of interest by charterers to put more TDRs to work in the year ahead.

"From April 2019, SAPE will put its Sapura Jaya semi-tender to work in Angola at a good rate of US$250k per day (versus just US$100k per day in Southeast Asia), according to Riglogix. For FY20F we assume a higher utilisation rate of 47% versus 36% in FY19, and higher charter rate of US$122k per day versus US$112k per day the year before," said CIMB.