This article first appeared in The Edge Financial Daily on July 11, 2019
Sapura Energy Bhd
(July 10, 29.5 sen)
Maintain hold with a lower target price (TP) of 33 sen: Sapura Energy Bhd’s engineering and construction (E&C) and drilling divisions, which had seen a few consecutive earnings disappointments, could see better days in the coming quarters on the back of higher rig utilisation. However, we still see risks from poor E&C margins that may potentially drag down the pace of recovery and we now estimate financial year 2020 (FY20E) to remain in the red. While we acknowledge that losses are set to narrow, we think that investor demand may remain lacklustre until there are clearer signs of an earnings recovery.
We expect the drilling division to help narrow overall group losses as rig utilisation improves from the current 33% to about 55% by end-FY20E. Assuming all goes well, the drilling division will likely see profit break-even by the third quarter (3Q) of FY20. On the flip side, E&C will likely see some margin pressure — while yard utilisation is projected to improve significantly from the prior year, the execution margin remains a question given the prices in securing these projects under this low oil price environment. The associate profit could also be weaker on lower renewed charter rates as two Brazil pipe-lay support vessel (PLSV) contracts are expected to expire in July and September 2019. Nevertheless, we remain positive on the exploration and production (E&P) division as production levels will see a ramp-up in FY21 once the SK408 Gorek, Larak, Bakong field achieves first gas by end-2019.
We cut our previous FY20 profit forecast to a loss and slash FY21-22E profits by 59%-49%, after imputing lower E&C and drilling margins, and a lower Brazil profit contribution after the contract expiry of two PLSV vessels in FY20 and one in FY22. Our earnings revision also took into account our lower average Brent oil price forecasts of US$67 (RM277.38) per barrel in FY20 and US$68 per barrel in FY21.
Post cutting our earnings per share forecasts and rolling forward our valuation to FY21E, we lower our sum-of-the-parts-based TP to 33 sen (from 35 sen), and maintain a “hold” call until the E&C division shows a more meaningful earnings recovery. Upside and downside risks to our “hold” call include: i) sharp movements in the Brent oil prices and foreign exchange; ii) higher drilling rig utilisation; and iii) better-than-expected E&C execution margins. — Affin Hwang Capital, July 10