CIMB Research retains Add for Sapura Energy, higher target price of 89 sen

Sapura

KUALA LUMPUR: CIMB Equities Research is maintaining its Add call for Sapura Energy with a higher sum-of-parts based 89 sen target price. The previous target price was 80 sen and the last traded price 50 sen.

It said on Thursday the re-rating catalysts include additional contract wins, the development of the SK408 production sharing contract (PSC) and the exploration and production (E&P) arm’s listing.  

Sapura Energy’s FY1/18 core net loss of RM311m was 18% lower than its forecast, due to operating and head office cost savings, but 43% more than consensus. 

“While outperforming our estimates, the low base augmented the percentage swing. 

“Sapura Energy highlighted independent forecasts for offshore capex to rise above FY18 levels by FY21F, suggesting that two years’ patience will be needed for a full recovery,” it said. 

Sapura Energy reported core net loss of RM125m in 4QFY18 and RM311m for FY18, against profits in the previous year. 

CIMB Research had expected the 4Q loss to be similar in size to 3Q’s RM194m loss, but instead, SAPE’s quarterly loss shrank quarter-on-quarter. 

This was due in part to lower depreciation as an asset impairment of RM2.1bil was booked in the middle of the 4Q (largely related to drilling assets), and also due to some operating cost savings at the drilling business and additional head office cost savings.

Excluding a small impairment of RM63m against the engineering and construction (E&C) assets, the business reported a core operating loss of RM26m, which was the first-ever quarterly loss in the research house’s knowledge. 

At the end of October, the E&C orderbook implied revenue of RM1bn for the 4Q, but only RM670m was achieved, as revenue recognition probably spilled over into FY19F. 

“Our forecast for E&C revenue for FY19F remains at RM4bn; in our estimate, Sapura Energy has contracts in-hand that can potentially deliver RM2.7bn in revenue. 

“Sapura Energy needs more E&C contracts to bridge the remaining RM1.3bn revenue gap for FY19F. This may come from infrastructure contracting for the development of Phase 1 of the SK408 gas block offshore Sarawak, for which the Gorek, Larak and Bakong fields are expected to begin production in less than two years, i.e. from late-CY19F,” it said. 

CIMB Research said the SK408 Production Sharing Contract (PSC) contractors are expected to open up bidding for three wellhead platforms soon, for which we expect SAPE to have a good chance of winning. 

Drilling reported a core pretax loss of RM210mil in FY18, from a profit of RM239mil in FY17, as average utilisation fell from 57% to 36%, and average charter rates fell 14% on-year from an estimated US$132,000 a day to US$113,000 a day. 

“Sapura Energy is working towards the listing of its energy arm. Assuming a valuation of RM6bil and Sapura Energy sells a 30% stake, proceeds of RM1.8bil can be used to prepay group debt and ensure that Sapura Energy will have minimal debt repayments until FY23F. 

“This should ease the concerns of many investors we have spoken to,” said CIMB Research.