Value emerging in Sapura Energy after sharp sell-off

KUALA LUMPUR: CIMB Equities Research sees value emerging in Sapura Energy after the sharp sell-off on Thursday after its 9MFY1/18 core net loss of RM186mil was almost four times higher than its previous loss forecast, while consensus had forecast a profit. 

It said on Friday engineering and construction (E&C) margins weakened more than expected, leading it to downgrade its earnings forecasts materially. It also cut its sum-of-parts based target price to RM1.42 from RM1.63. It closed at 97 sen on Thursday.

“While conditions remain tough, we upgrade the recommendation from Hold to Add as long-term value is now emerging from the sharp sell-off yesterday afternoon. We expect narrowing losses from FY19F onwards to help lift the share price,” it said.

CIMB Research said Sapura Energy’s deep core net loss of RM194mil in 3QFY18 was mainly due to the large on-year fall in E&C profits, coupled with drilling’s decline into its second-consecutive quarterly loss. 

Reported losses were even larger, with RM46mil in share of losses arising from the sale of the Sapura 3000 by 50%-owned SapuraAcergy to Sapura Energy, and RM22mil in net forex loss. 

“This was Sapura Energy’s worst-ever quarterly performance since the oil price downturn began,” it said.

E&C’s 3QFY18 was particularly weak, as work for ONGC slowed down with the onset of the Indian monsoon, and as pipelay work on Turkey’s TANAP project began only at the tail-end of the quarter. 

The orderbook implies 4QFY18 revenue of RM1bn for E&C, down 36% on-year and not much improved on-quarter, suggesting another weak set of quarterly profits.

“Against estimated E&C revenue of RM4.3bil in FY18F, Sapura Energy only has contracts worth RM1.5bil for FY19F. We have forecast E&C revenue of RM4bil for FY19F. 

“Although a weak 1HFY19F is very likely, Sapura Energy may secure new offshore vessel and fabrication work that may help it do better in 2HFY19F. In other words, the next six to nine months may be challenging for the E&C division, but Sapura Energy appears more optimistic for 2HFY19F,” it said.

CIMB Research said only five of Sapura Energy ’s 15 rigs were employed in 3QFY18, and it expects the 33% utilisation rate to remain stable in 4QFY18F, leading to an estimated 36% utilisation rate for FY18F.

 For FY19F, utilisation is expected to remain flat at 35% (firm period: 29%, optional period: 6%), but we have assumed that new contract wins will help raise the full-year FY19F utilisation to 40%.
 
Sapura Energy noted that there is indicative client interest to employ more of its rigs, commencing from 3QFY19F onwards.  

Sapura Energy completed the field development of the B15 gas field in Oct 2017, and will begin producing gas from 4QFY18F. 

Production from the PM323 oil field may also improve now that the infill drilling at the East Belumut and West Belumut fields was completed last quarter. 

Furthermore, oil prices have increased to US$62 currently, from an average of only US$51 in 1HFY18 and US$58 in 3QFY18. 

“Despite forecasting net losses, we think Sapura Energy’s EBITDA is likely enough to service interest expense and pay taxes. 

“Capex is expected to be limited to the development of the Gorek and Larak gas fields at SK408, mostly funded by debt, and its borrowings have been restructured so that there are limited principal repayments over the next 18 months,” it said.