This article first appeared in The Edge Financial Daily on April 16, 2019

Sapura Energy Bhd
(April 15, 33.5 sen)
Maintain outperform with an unchanged target price (TP) of 43 sen: Last week, Sapura Energy Bhd announced its first new contract wins of RM1.3 billion for the financial year. The new wins include two local drilling contracts, and three engineering and construction (E&C) contracts from overseas.

We are positive on the new contract wins, highlighting the company’s competitiveness and job-winning abilities. In fact, its subsea pipeline installation contract in the Gulf of Suez represents the company’s first foray into Egypt. Also, a submarine rescue service contract — its first from The Royal Australian Navy — to design and fabricate a remotely operated vehicle, underlines the company’s technological and engineering competencies.

Overall, these new wins are expected to lift the company’s order book to a three-year high of approximately RM18 billion, although its drilling utilisation would remain unchanged at about six of 16 rigs from end-financial year 2019 (FY19) — with an additional rig scheduled to commence in the second quarter (2Q) of FY20 — as the new drilling contracts are meant for rigs currently utilised, that is extension and/or replacement contracts.

Having completed its recapitalisation, we believe the worst should be over for Sapura Energy, underpinned by its cleaned-up balance sheet, with a net gearing of 0.6 times; a three-year-high secured order book of about RM18 billion; and job execution competencies. Moving forward, with its tender book of about US$11 billion (RM45.21 billion), more than half of which is from the Middle East and Africa, we are expecting more contract wins throughout the year.

After the awarding of contracts, we made no changes to our earnings numbers for FY20 to FY21 estimate as the new wins remain within our order book replenishment assumption of RM5 billion versus FY19 wins of RM9.3 billion. We are forecasting a turnaround in FY20, especially in the second half of the year, driven by savings in interest costs from repayment of borrowings following its recapitalisation, lower depreciation costs following impairments of RM1.5 billion in FY19 and several fabrication jobs load-out in 2Q to 3Q.

We reiterate our “outperform” rating, with an unchanged TP of 43 sen, pegged at 0.5 times price-to-book value. Sapura Energy is our tactical top pick for the quarter in the oil and gas sector, being a laggard play with limited downsides, as well as capitalising on its turnaround story. Further catalysts may come from successful earnings delivery and more contract wins. The risks to our call include poorer-than-expected margins, a lower-than-expected order book replenishment and failures in job executions. — Kenanga Research, April 15