Analysts mixed on Sapura Energy’s outlook due to Covid-19 and oil price crash

MIDF Research has maintained its neutral call on Sapura Energy Bhd with a revised target price (TP) of 8.6 sen from 28 sen previously given the global virus pandemic and ongoing oil price crash.

In a note on April 30, the research house opined that the operating environment is expected to remain challenging for the remainder of CY20.

“This is because the impact from the current headwinds will continue to be felt through six months from the onset of the crisis whereby operations are likely to resume in a ‘new normal’ environment with movement restrictions and businesses taking on a cautious stand on spending,” it said.

MIDF Research expected profitability to remain a concern due to the continued margin compression experienced by Sapura Energy’s exploration and production (E&P) segment as well as competitive charter rates for its rigs should the current headwinds persist for more than six months.

“That said, we believe that earnings will be slightly cushioned in FY22 in line with the gradual ramp-up in engineering and construction (E&C) project execution milestones in FY21 and increase in the number of rigs in operation (seven to eight rigs in 2HFY20) which will negate the impact of the compressed margins and competitive charter rates.”

Furthermore, with the gas production from Bakong and Gorek gas development project in Sarawak basin due for first lifting in mid-CY20, the research house opined that it will positively impact Sapura Energy’s earnings going forward given that majority of the gases to be produced by the field has been sold to Petronas-operated Bintulu LNG complex.

Meanwhile, Affin Hwang Capital Research has downgraded the stock to sell with a TP of five sen from seven sen previously on the back of multiple headwinds, which include the ongoing debt refinancing, finalisation of working capital extension and cost rationalisation.

“With the oil price expected to stay low, we do not discount the possibility of further order book deferment which Sapura Energy is already facing.”

The research house has also slashed its earnings forecasts to reflect these key changes and deferment of E&C activities as requested by clients and lowering of earnings before interest, taxes, depreciation, and amortization (EBITDA) margins (from 3% to 2%) and reduced drilling margins (from 40% to 38%).

“We also imputed a higher interest cost post the finalisation of its refinancing exercise. All in, we widen our loss forecasts by 22-44%,” it said.

Meanwhile, AmInvestment Bank Research has maintained its sell call on Sapura Energy with an unchanged fair value of four sen pegged to a five-year price/book value (P/BV) trough of 0.1x on the group’s FY23F book value.

Sapura’s FY20 results registered massive impairments and provisions of RM3.7 bil, which stem from goodwill impairments of RM3 bil from the drilling division, RM241 mil fixed asset impairment and RM439 mil provision in anticipation of extended project delays due to the impact of Covid-19 and expectations for a prolonged sector recovery.

“We understand that there may be further provisions in FY21F as the E&P segment did not make any substantive impairments, pending the audit of its joint venture partner, Austria’s OMV Aktiengesellschaft.”

At 11.17am, the counter was trading at 8.5 sen, unchanged from yesterday’s close, giving the company a market capitalisation of RM1.36 bil. — April 30, 2020

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