KUALA LUMPUR: RHB Research has upgraded Sapura Energy
to Buy from Neutral, with an unchanged target price of 82 sen reflecting 37% upside after the oil and gas services company bagged contracts worth RM1.8bil.
In its research note issued on Friday, it said the contract wins comprise of EPCC and drilling jobs (mainly overseas).
“While the job win is neutral for our forecasted numbers – being within our orderbook replenishment assumption – it is a positive for Sapura Energy, as it points to the recovery of the global offshore market.
“This takes its year-to-date contracts won to RM4.2bil, at 52.5% of our full-year assumption. We maintain our earnings estimates.
“The recent sell-down is unjustified, given the company’s significant exposure to overseas markets, and its huge upstream oil-producing asset potential in the long term,” it said.
RHB Research said the RM1.8bil in contracts were within its assumptions, at 52.5% of its full-year RM8bil orderbook replenishment estimate.
“They also bring the group’s orderbook value to RM18.3bil, equivalent to a 2.4 times revenue cover for FY19,” it said.
The research house said the earnings before interest and tax (EBIT) margins for most of its engineering & construction (E&C) contracts are at 5%-6% typically, while its tender rig division should still be in the red – as the rig contract secured yesterday is short-term in nature (three to six months).
However, it noted that Sapura Energy was securing significantly more contracts overseas – which indicates that global offshore activities are picking up.
RHB Research maintained its earnings forecasts, as most of the new contracts secured will only kick off in 4QFY19 (Jan) onwards.
That aside, it believes that, in FY19, Sapura Energy will still see an earnings drag from its loss-making drilling division.
“Our sum-of-parts based TP remains at 82 sen. The recent weakness in its share price is unjustified, given its recent positive announcements of oil discoveries and solid contract wins.
“FY19 earnings should admittedly still be in the red, due to the lack of contract wins in FY18 –and this is priced in already. We still believe the company has great potential to enjoy long-term earnings growth from its exploration & production business.
“Risks to our call are a significant plunge in the Brent crude price, and cost overruns on E&C works,” it said.
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