CIMB Research retains Hold, TP of 37c for Sapura Energy

Kenanga Research said while the outlook is expected to improve from financial year 2020 (FY20) onwards, it has maintained its

KUALA LUMPUR: CIMB Equities Research is retaining its Hold call for Sapura Energy with an unchanged sum-of-parts based target price of 37 sen as it may need more time to return to the black.

The research house said on Wednesday Sapura Energy announced several contracts on April 12, and more could follow as it is in the process of bidding for many more contracts. 

“The key is how profitable these contracts will be, given that Sapura Energy  has been under pressure to build its orderbook and may have bid competitively,” it said.

To recap, the company secured RM1.279bil in new contracts, of which the research house estimates RM400mil are in new drilling contracts, and RM900mil in new engineering and construction (E&C) contracts. 

Sapura Energy had earlier disclosed that it had a RM17.2bil orderbook as at Jan 31, 2019, so the new wins will raise the proforma Jan 31 orderbook to RM18.5bil, or RM18.6bil factoring in another drilling contract which had not yet been announced by Sapura Energy but already reflected in Riglogix’s database. 

“We had factored in RM4.7bil in E&C revenue for FY1/20F, against RM4.6bil in contracts won to-date.
 
“Our revenue target may be exceeded since we are still in the early part of the financial year, but we are more concerned about how profitable these contracts will be,” it said.

 Sapura Energy’s E&C arm delivered an estimated EBITDA margin of only 1% in FY19, or 5.6% if excluding a RM170m in cost overruns from a domestic onshore project, which compares unfavourably to FY18’s EBITDA margin of c.10% and FY17’s c.13%. 

For E&C contracts to be executed in FY20F, CIMB Research factored in an EBITDA margin of 5%, which it believes is reasonable, albeit tight. 

“The risks to Sapura Energy’s E&C earnings remains high, given that the expected thin margins leave little room for error in execution. 

“We have assumed Sapura Energy to deliver E&C revenue of RM5bn and an EBITDA margin of 10% for FY21F, assuming that global E&C asset utilisation rates improve following an expected increase in offshore capex,” it said.

CIMB Research said Sapura Energy is bidding for E&C work in Qatar’s North Field, India’s Heera field, Saudi Arabia’s Marjan and Zuluf fields, Mozambique’s Mamba field, pipeline installation work in Greece and India, among many others, as reported by Upstream. 

New contracts for Sapura Energy’s tender drilling rigs (TDR) SAPE announced two new contracts for the T-9 tender barge and the Berani semi-tender worth c.US$100m. Another contract for the T-18 worth c.US$22mil was reported by Riglogix but yet to be announced by Sapura Energy. 

“Based on contracts secured to-date, the TDR fleet as a whole is poised to deliver 41% utilisation rate in FY20F, which should rise once more drilling work is secured, to our forecast of 46%. 

“But we note that there are big differences between the shallow-water tender barge fleet which has secured contracts for 24% utilisation, vs. the deep-water-capable semi-tender fleet with 61% utilisation for FY20F. 

“We expect this to persist, as tender barges compete with more flexible and more competitively-priced jack-up rigs in Southeast Asia. 

“As such, for the forecast period, we lower our utilisation assumption for tender barges from 35% to 30%, and raise our utilisation assumption for semi-tenders from 60% to 65%,” CIMB Research said.