CIMB Research sees very tough conditions ahead for Sapura Energy
KUALA LUMPUR: CIMB Equities Research expects conditions to remain very tough this year for Sapura Energy which reported a disappointing Q1 performance.
The research house said on Friday the company posted core net loss of RM188mil making up 36% of its previous full-year loss forecast, due to weak margins.
“Consensus’ out-of-kilter FY20F profit forecast of RM130mil will need to be slashed significantly, likely weighing on future share price performance.
“Maintain Hold with lower SOP-based target price of 32 sen, as we cut our valuation of the drilling business on slower recovery assumptions,” it said.
Sapura Energy’s 1QFY20 core net loss of RM188m was 21% wider on-year, mainly on account of the weaker underlying earnings at all of its’s business segments, namely the engineering & construction (E&C), tender drilling rig (TDR), Brazil pipelay supply vessel (PLSV), and the exploration & 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 4QFY19, and the fall in cash interest expense following the repayment of RM7bil of borrowings in early-February 2019 from the proceeds of the rights and RCPS-i issues and the proceeds from the divestment of 50% interest in the upstream E&P business to OMV.
“The reported net loss, however, narrowed by 20% on-year due to several exceptional gains,” it said.
The factors were1) net forex gains of RM25mil, 2) gain on disposal of fixed assets of RM11mil, 3) an RM88mil arbitration settlement received from Newfield in relation to Sapura Energy’s purchase of Newfield’s oilfield and gasfield blocks in Malaysia in 2014, partially offset by 4) a RM63m write-off of capitalised upfront loan arrangement fees.
The E&C EBITDA margin declined to just 2% in 1QFY20, from 8% in 1QFY19, as several of Sapura Energy’s projects remain in the early stages of execution where margins are weaker, and because acute competition in the market had required Sapura Energy to bid aggressively for its contracts.
“There is hope for some improvement as we head into 2HFY20F 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.
“Margins on new contracts, if any, will be lower as charter rates have weakened,” it said.
Based on contracts announced to-date, Sapura Energy’s may achieve firm TDR utilisation of 40% invFY20F, or 43% when including option periods, 6% pts higher than the 37% achieved in FY19.
While rates in Southeast Asia probably did not change, Sapura Energy did secure work in Angola for the Jaya semi-tender at a very attractive rate. This underpins an expected improvement in the TDR earnings for this year.
The Gorek, Larak and Bakong fields of SK408 are on track for first gas at end-CY19F, and this will deliver higher earnings to Sapura Energy.
In the meantime, E&P earnings may be impacted by recent declines in oil prices, and amortisation charges on “purchase price adjustment” arising from the upward revaluation of the carrying value post-OMV sale.
Source: TheStar