This article first appeared in The Edge Financial Daily on December 9, 2019

Sapura Energy Bhd
(Dec 6, 26 sen)
Maintain hold with a lower target price (TP) of 28 sen: Sapura Energy Bhd’s cumulative nine months of financial year 2020 (9MFY20) core loss missed expectations again, despite us projecting losses that were already significantly higher than the street at RM357 million versus consensus RM220 million. The deviation was due to the razor-thin engineering and construction (E&C) earnings before interest, taxes, depreciation and amortisation (Ebitda) margin which stood at 1% in 9MFY20 (versus our previous forecast of 2%). Drilling losses also widened as the number of working rigs fell to five units (second quarter of FY20 [2QFY20]: six units), which was rather unexpected. Sapura Topazio also saw 2.5 weeks of special periodic survey (SPS) downtime leading to a drop in joint venture (JV) profit. The JV contribution was also dragged down by a RM17 million write-off in Sapura Acergy investment. On the flip side, the Sapura OMV JV reported a RM14 million profit (versus RM6 million loss) due to an overestimation of depreciation following the finalisation of purchase price made earlier by OMV. Net gearing remained near 0.7 times level but net debt position has notably increased to RM9.9 billion (4QFY19: RM8.9 billion)

We increase our projected FY20 losses by 27% as we lower our E&C Ebitda margin to 1% (from 2%), and assume weaker earnings from Brazilian operations, factoring in lower renewal rates for Sapura Topazio and the near one month downturn from its SPS exercise. We now assume estimates for the financial year 2021 (FY21E) to register a RM41 million loss (from a break-even earlier) and lower FY22E profit forecasts by 25% mainly on a less aggressive margin improvement.

The stock price has been muted despite the recent O&G rally as business recovery still looks quite a distance. We expect recovery in E&C margins to only materialise from the second half of FY21 (2HFY21) onwards with major projects gradually moving to the higher execution margin phase. We maintain our “hold” call until clearer signs of an earnings recovery emerges. We lower our sum-of-the-parts-based 12-month TP to 28 sen (from 30 sen previously). — Affin Hwang Capital, Dec 6