Sapura Energy fails to convince analysts despite positive Q2 FY21 surprise

PETALING JAYA: Despite the positive surprise delivered by Sapura Energy for second-quarter financial year 2021, which saw a net profit of RM23 million against a net loss of RM112.6 million previously, analysts are unconvinced the performance would be sustainable postpandemic.

Public Investment Bank (PIVB) Research noted the performance for the period was attributed to a positive surprise from its engineering and construction (E&C) business’ profit margins arising from US$20 million in variation orders recognised during the quarter.

This was also supported by cost rationalisation exercises with RM450 million worth of initiatives that had been fully implemented via salary cuts, procurement savings, productivity efficiency and others.

“We do not see this improvement as sustainable for now however, with changes in operating procedures amid the current operating environment post-pandemic, as well as lower oil prices weighing on margins,” explained the research house.

It also highlighted that the group drilling segment’s pre-tax losses widened to RM32.4 million from RM14.9 million in the previous quarter, with revenue dropping 22.2% to RM187.4 million quarter on quarter.

PIVB Research pointed out rig utilisation stood at seven units which is expected to reduce to five in second-half FY21 as work is being suspended amid the current uncertain oil price environment.

“Overall, we foresee Sapura’s earnings outlook remaining uncertain and unlikely to return to sustainable profitability in the near term. Activity levels remain low while profit margins could be volatile depending on the work progress,” it said.

With that, PIVB Research narrowed its loss projections for the group’s FY21/22/23 to RM95 million, RM286.7 million and RM115.1 million from RM448.5 million, RM401.2 million and RM198.9 million net loss respectively. It also maintained its neutral call with a slightly higher target price of 10 sen.

Similarly, CGS-CIMB noted that Sapura was keen to emphasise that the quarter’s earnings turnaround is sustainable on the back of cost rationalisation measures.

“On the other hand, the 1HFY21 E&C turnaround has to be interpreted in light of the sizable kitchen-sinking done during 4Q’FY20,” it said.

“We know that those provisions were made with respect to foreseeable project losses as a result of expected liquidated ascertained damages (LAD) for the potential failure to meet project completion timelines and project cost overruns, among others.”

Following the group negotiations and clients’ agreement for various variation orders to cover cost overruns, and to extend project completion timelines (which may now make LAD provisions unnecessary), more than

US$20 million of the fourth-quarter FY20 provisions were written back in secondquarter FY21.

The research house does not believe the latter writebacks are regularly repeatable, thus the E&C EBITDA margin of 24% in for the second quarter should not be extrapolated to the full year.

It pointed out stripping out about US$25 million in profits from the E&C segment would cause the quarter’s EBITDA margin to fall to 14%, better than first-quarter FY21’s 9% and second-quarter FY20’s 1% margins, but below the “high-teens” EBITDA margin that Sapura represented as being sustainable.

CGS-CIMB highlighted that the segment’s margins has been volatile in the past, and with the complexities surrounding project execution timelines, project costing, variation order and LAD estimates, for which the group can only supply cursory and imprecise guidance, there is significant risk to any estimates of how the E&C business will perform in the future quarters.

With the writeback in first-half FY21, it has raised its margin forecast for the year to 18% from 5% previously and 12% for FY22-23 (from 2%).

“We doubt that the FY21F EBITDA margin of 18% will be sustainable at that level into FY22-23F in the absence of writebacks and in light of the continuing tough and competitive bidding environment due to the low oil prices that has led to oil majors’ capex cuts, although some cost optimisation gains may be sustainable.”

With that the research house has reiterated its reduce call on the counter with a target price of 6 sen from 4 sen previously.