This article first appeared in The Edge Financial Daily on March 27, 2019
Sapura Energy Bhd
(March 26, 33.5 sen)
Maintain buy with a target price of 45 sen (previously 46 sen): Financial year ending Jan 31, 2019 (FY19) results were below expectations, largely on weaker-than-expected earnings before interest and tax (Ebit) margins from its engineering and construction (E&C) division, on unfavourable contract mix. Special dividend per share (DPS) of half a sen positively surprised. Post-balance sheet restructuring, we expect losses to narrow significantly in the 2020 financial year (FY20) due to cost savings, and for E&C job flows to improve globally. We tweak forecasted 2020 and 2021 financial year ( FY20F-21F) earnings by 4.2% and -2%.
Excluding extraordinary items, the fourth quarter ended Jan 31,2019 (4QFY19) core loss was RM582.9 million, bringing FY19 cumulative core loss to RM979.4 million. This was greater than our (RM501.4 million loss) and consensus (RM399.3 million loss) forecasts, mainly due to lower-than-expected E&C division Ebit margins driven by unfavourable contract mix. To our surprise, special DPS of half a sen per share was declared, implying 1.4% dividend yield.
Core losses widened year on year (y-o-y) in 4QFY19 mainly on the E&C division’s greater losses, not just due to unfavourable contract mix, but the lack of contracts in final stages recognised in the quarter. Energy division contribution was also lower, due to lower realised oil prices (US$62 a barrel (bbl) in 4QFY19 versus US$69 a bbl in 4QFY18). Quarter-on-quarter (q-o-q), core losses widened for the same reasons.
Rights issuance with redeemable convertable preference shares and disposal of 50% stake to OMV AG was completed in 4QFY19 and this increased the group’s cash balance to RM8.1 billion from RM1.7 billion a year earlier. This is expected to bring about RM300 million in interest savings to be realised in FY20, while paving the way for Sapura to further inject capital into exploration of its upstream assets to further convert its 2C reserves to 2P reserves in the medium term.
In view of oil prices stabilising at US$73.50 a bbl in 2019, we have taken the view that job flow for the upstream E&C segment would pick up globally post underinvestment in upstream capex by the majority of the oil producers. According to Rystad, the number of offshore projects to be sanctioned in 2019 would be significantly higher at 86 projects versus 2018’s 57 projects, indicating that order book replenishment for Sapura would be potentially higher in FY20 for its E&C division. — RHB Research Institute, March 26