Thursday 28 Mar 2024
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KUALA LUMPUR (Dec 22): Sapura Energy Bhd is among the most active stocks on Bursa Malaysia today amid mixed reviews from analysts on the group’s prospects after it released its financial results for the third quarter ended Oct 31, 2020 (3QFY21).

Kenanga Research has maintained its "underperform" call for the stock with an unchanged target price of five sen, mainly premised on balance sheet and impairment risks coupled with short-term uncertainty.

“Following the oil downturn this year, most of the oil and gas names under our universe have recognised impairments in the aftermath. However, year to date, Sapura Energy has still yet to recognise any impairment so far, which leads us to speculate of possible balance sheet and impairments risks going into the last quarter of FY21,” said Kenanga Research in a note after attending an analyst briefing hosted by the group.

Besides the impairment risk, Kenanga Research also noted that market outlook still remains uncertain and challenging at the moment. Hence, it expects global spend on engineering, procurement, construction and installation jobs to be even lower in 2021 as compared to 2020, which may dampen Sapura Energy’s prospects of order-book growth.

Commenting on the group’s 3QFY21 results, Kenanaga Research said stripping off all the unusual items and a net forex loss of RM6 million, there was a core net loss of RM127.8 million during the quarter, raising the cumulative nine-month core net loss to RM124.2 million.

The nine-month results are deemed broadly in line with expectations, coming in at 77% and 81% of the research house’s and consensus full-year loss forecasts, respectively.

On a brighter note, the group’s borrowings will be extended for an additional seven years after the refinancing exercise ends at the end of next month. Kenanga Research said “this would at least alleviate immediate borrowings-related uncertainties for the time being”.

AmInvestment Bank Research had a different interpretation on Sapura Energy’s prospects as it upgraded its recommendation to “buy” from “sell” with a higher fair value of 29 sen, from five sen previously.

“Even though we acknowledge the possibility of losses from the normalisation of contract provisions and likely asset impairments in 4QFY21, we view the group’s downside risks as cushioned by the steep 78% book value discount currently,” said AmInvestment Bank Research in a note.

The research house shared that the group views substantive provisions as less likely under the improved oil price environment compared to mid-March this year, notwithstanding the pending audit of its exploration and production (E&P) segment by its joint venture partner SapuraOMV Upstream (Western Australia) Pty Ltd

The "buy" call for the stock also stemmed from the fact that Sapura Energy is on the verge of refinancing its RM10 billion debt for another seven years by the end of January next year without any substantive interest cost increases, which the research house believes is assisted by Sapura Energy’s largest GLC-backed shareholder.

Further, it also noted that Sapura Energy has secured additional working capital of RM1.2 billion for its ongoing and prospective projects.

As the group is bidding for RM38.8 billion (increased by 32% quarter-on-quarter) of new jobs with additional prospective projects worth RM68 billion, the research house expects order book growth momentum to return over the next three to six months with the brightening outlook in upstream capex upcycle.  

Against the backdrop of improving prospects of new jobs across the globe and underpinned by a soon-to-be revitalised debt structure, AmInvestment Bank Research said the stock currently trades at a low 0.2 times price-to-book value.

MIDF Research, which has maintained its “buy” call with an unchanged target price of 16 sen, is also of the view that the group’s prospects would ride on recovery of crude oil prices going forward as well as deemed its current valuation appealing.

While volatility surrounding its operating environment remains persistent and exacerbated by the Covid-19 pandemic developments, MIDF Research thinks the group will be able to sustain its current quarterly profits into FY22.

This is underpinned by the group’s ongoing cost optimization initiatives which will stretch into FY22, stable movement of the crude oil price which would sustain current and encourage future work orders and sustained margin between 12% and 13% from its engineering and construction (E&C) segment, said MIDF Research.

MIDF Research also believed that the company’s earnings will be lifted in FY22 in line with the gradual ramp-up in E&C project execution milestones which will negate the impact of the compressed margins and competitive charter rates plaguing its drilling segment.

Furthermore, as the utilization rate of its yard is currently at 50%, it opined that the segment has plenty of room to undertake more work orders in the future which will bode well for its earnings trajectory going forward.

In addition, it also expects better performance from its E&P segment in FY22 as its SK408 and SK310 production sharing contract for Gorek, Larak and Bakong are expected to remain stable with increasing production going forward.

“Additionally, with the SK408 Jerun UGSA key terms [having] finally been agreed upon with Petronas, it will finally allow Sapura Energy to put in their final investment decision (FID) into the project. Hence, management expects the Jerun CPP award to be out by February 2021 and this will contribute positively to the group’s earnings in FY22,” it added.

Besides, MIDF Research said the counter’s current share price — currently trading at an attractive price-earnings ratio (PER) of 11.9 times, which is below its -1 standard deviation (SD) five-year average PER — presents a good opportunity to accumulate the shares given that oil price is expected to remain stable throughout 2021 at the US$48 to US$53 per barrel level which will benefit the group’s E&P segment.

It also said Sapura Energy is well-positioned to potentially win more contracts given its width and depth of expertise in providing various oil and gas-related services.

Sapura Energy posted a net profit of RM17.21 million for 3QFY21, compared with a net loss of RM100.89 million a year ago, thanks to improved project margins from its E&C business, additional income from the previous disposal of a 50% stake in a subsidiary, and higher share of profit from its associates and joint ventures.

This came despite a decline in revenue to RM1.33 billion from RM1.78 billion, as its E&C and drilling segment saw lower revenue, in line with the progress of projects being executed, and lower number of operating days for working rigs in 3QFY21.

On a quarter-on-quarter basis, the integrated oil and gas services provider's net profit is down 27.5% from RM23.74 million, though revenue rose 9% from RM1.22 billion.

Sapura Energy shares have fallen 54% from 28 sen on the first trading day of this year. Its current price of 12.5 sen yields it a market capitalisation of RM1.9 billion.

Edited ByS Kanagaraju
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