Friday 29 Mar 2024
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This article first appeared in The Edge Financial Daily on July 1, 2019

Sapura Energy Bhd
(June 28, 30 sen)
Maintain hold with a lower target price of 32 sen:
Sapura Energy Bhd’s first quarter of financial year 2020 (1QFY20) core net loss of RM188 million was 21% wider year-on-year (y-o-y), mainly on account of the weaker underlying earnings at all of Sapura Energy (Sape)’s business segments, namely the Engineering and Construction (E&C), tender drilling rig (TDR), Brazil pipelay supply vessel (PLSV), and the Exploration and Production (E&P) segments.

 

The core results would have been even weaker if not for the drop in depreciation expense as a result of the drilling asset impairments made in the fourth quarter (4Q) of FY19, and the fall in cash interest expense following the repayment of RM7 billion of borrowings in early February 2019 from the proceeds of the rights and Islamic redeemable convertible preference share issues and the proceeds from the divestment of 50% interest in the upstream E&P business to OMV Group.

The reported net loss, however, narrowed by 20% y-o-y due to several exceptional gains, such as 1) net forex gains of RM25 mllion, 2) gain on disposal of fixed assets of RM11 million, 3) an RM88 million arbitration settlement received from Newfield in relation to Sape’s purchase of Newfield’s oilfield and gasfield blocks in 2014, partially offset by 4) a RM63 million write-off of capitalised upfront loan arrangement fees.

The E&C earnings before interests, taxes, depreciation and amortisation margin declined to just 2% in 1QFY20, from 8% in 1QFY19, as several of Sape’s projects remain in the early stages of execution where margins are weaker, and because acute competition in the market had required Sape to bid aggressively for its contracts.

There is hope for some improvement as we head into the second half (2H) of FY20F and FY21F. Meanwhile, the PLSV business in Brazil will see two of its six assets complete their five-year firm period this year, and Sape has not yet secured replacement contracts for them.

The Gorek, Larak and Bakong fields of SK408 in Sarawak are on track for first gas at end-calendar year 2019, and this will deliver higher earnings to Sape. — CGSCIMB Research, June 28

 

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