4QFY18 Better than Expected BUY. Last Traded: RM0.50

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1 R E S U L T S U P D A T E Thursday, March 29, 2018 FBMKLCI: 1, Sector: Oil & Gas THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* Sapura Energy Bhd TP: RM0.65 (+31%) 4QFY18 Better than Expected Last Traded: RM0.50 BUY Kylie Chan Sze Zan Tel: kyliechan@ta.com.my Review Sapura Energy s (SAPE) FY18 core net loss of RM300mn (FY17: RM400mn profit) was below our forecast of RM389mn loss, but above consensus loss estimates of RM217mn. FY18 headline net loss of RM2.5bn (FY17: RM208mn profit) includes asset impairments of RM2.1bn, which was mainly for SAPE s tender rig fleet (RM2.1bn). Additionally, it also included loss on disposal of vessel by SapuraAcergy (RM46.1mn) and other exceptionals, including net FX gains (RM35mn). According to management, the FY18 impairment exercise will result in improved profitability and competitiveness for the drilling fleet moving forward. This is on the back of a lower cost base, where depreciation savings are estimated at USD40mn p.a. Despite weaker seasonality, quarterly core losses more than halved to RM72mn in 4QFY18 (3QFY18: RM206mn). This was mainly attributed to partial quarterly recognition of depreciation cost savings at the Drilling segment. As expected, E&C slipped into core pretax loss in 4QFY18 (3QFY18: RM22mn PBT) due to slower activities as a result of the monsoon season. FY18 core pretax profit for E&P was flat YTD due to lower lifted volumes of 3.5mn boe (FY17: 4.2mn boe) on the back of natural field production decline. This more than negated higher average crude lifting price of USD57/bbl (FY17: USD46/bbl) and successful in-fill drilling programs. Associate contribution was lower (-40% YTD) in FY18 due to: 1) drag from Sapura Acergy, which contributed an estimated RM78mn/30mn in headline and core net losses respectively (4QFY18: RM26mn loss), and 2) FY17 included partial year contribution from Berantai RSC (RM37mn) until its cessation in 2QFY17. Nevertheless, the Brazilian PLSV contracts continued to sustain robust profits, with estimated contribution of RM354mn in FY18. We expect losses to narrow in FY19, underpinned by: 1) depreciation savings, 2) removal of earnings drag from Sapura Acergy, which will be fully consolidated starting from FY19, and 3) uptick in E&P contribution on the back of higher oil prices and spike in volumes. FY19 net O&G production is expected to surge 26% YoY to 4.4mn boe, comprising: 1) crude oil: 2.8mn boe, 2) gas: 9.6mn ft 3 (1.6mn boe). The increased production is made possible by the startup of SK310 B15 fields. Share Information Bloomberg Code S AP E MK S tock Code 5218 Listing Main Market S hare Cap (mn) 5,992 Market Cap (RMmn) 2,996 Par Value (RM) wk Hi/Lo (RM) 2.10/ mth Avg Daily Vol ('000 shrs) 11,802 Estimated Free Float (% ) 54 Beta 2.70 Major S hareholders (% ) S apura Holdings E P F Forecast Revision (%) FY19 FY20 Forecast Revision (% ) (66.1) (148.2) Core Net P rofit (RM mn) (102.0) Consensus (49.9) TA/Consensus (% ) P revious Rating Buy (Maintained) Scorecard % of FY vs TA nm Above vs Consensus nm Below Financial Indicators FY19 FY20 Net Debt/E quity (x) ROA (% ) (0.3) 0.4 ROE (% ) (1.1) 1.3 NTA/S hare (RM) P /NTA (x) Share Performance Price Change (%) SAPE FBMKLCI 1 mth (35.7) (1.8) 3 mth (38.1) (3.6) 6 mth (46.4) (3.7) 12 mth (34.8) 5.3 (12-Mth) Share Price relative to the FBMKLCI Key Takeaways from Analyst Briefing General: Management is cautiously optimistic on earnings prospects in FY19, and guided for flat EBITDA growth. SAPE alluded that the worst is over, and is sanguine of a recovery in E&C order flows, particularly for fabrication, on Source: Bloomberg Page 1 of 5

2 the back of increased capex spend by oil majors. On the flipside, management believes that the drilling space will remain challenging due to a sustained lull in tenders. 29-Mar-18 Current orderbook of RM16.6bn reflects stable outstanding orders vs end- FY17 orderbook of RM16.7bn. It includes RM2.7bn of orders secured FYto-date, which largely comprises E&C contracts, with a chunky recent win being Pegaga EPCIC (RM1.78bn). Current orderbook translates to revenue visibility of RMRM5.6bn/RM3.1bn in FY19/20. Meanwhile, the balance RM7.9bn will be recognized from FY21 onwards. Balance Sheet: SAPE s immediate near term liquidity and balance sheet remain manageable, despite increased net gearing of 1.6x (FY17: 1.2x) post-impairment exercise. Furthermore, there will not be any substantial principal debt repayment due in FY19 (FY20: estimated RM800mn-RM1bn, depending on USD/MYR rates). Additionally, for FY19, similar to FY18, SAPE will not opt to increase borrowings, and shall finance E&P capex (FY18: RM890mn) internally. FY18 cash level inched lower to RM1.7bn (FY17: RM3.5bn), mainly due to lower, but still healthy operating cash flow of RM1bn (FY17: RM3.1bn), coupled with higher capex of RM890mn. FY18 impairments of RM70mn for the Engineering & Construction (E&C) segment was primarily attributed to assets that were idle or approaching the end of its useful lives. Meanwhile, for Drilling rigs, impairments were recognized on 12 rigs out of SAPE s fleet of 15 rigs. Whereas for E&P assets, management guided that despite improving oil prices, writebacks are not possible unless oil price volatility subsides over the longer term. Recall that back in 4QFY17, SAPE recognized E&P asset impairments of RM1.1bn. Exploration & Production (E&P): SK310 B15 is currently running at full capacity and is expected to contribute materially to earnings from 1QFY19 onwards. SAPE will conduct another in-fill drilling program for PM323 in FY19, as a follow-up to its successful in-fill campaign in FY18. Development of SK408 is currently underway, and negotiations have been finalized for its Gas Sale Agreement. SAPE will incur net capex spend of USD200mn for development of SK408 in st gas for Phase 1 of SK408 is targeted in CY19/20, whist the Final Investment Decision for Phase 2 is also expected in CY19/20. Drilling: Management gauges that the drilling segment would breakeven given a minimum deployment of 7 rigs (total fleet: 15 rigs). The group is expected to maintain its current utilization of 5 working rigs in FY19. Whilst one rig will come off-charter in FY19, this would be offset by SKD Alliance s new (start: Apr-18) 5+5 year contract with Shell Brunei. Management is hopeful of securing 50% fleet utilization in FY19, underpinned by expected demand of 14 tender rigs through The bulk of demand (11 rigs) are focused in South East Asia. Daily Charter Rates (DCRs) were lower YoY in FY18, which we estimate currently range at USD100K. Thus management does not discount contract Page 2 of 5

3 renewals at lower rates. On the bright side, management expects rates to be stable and flattish in FY Mar-18 Impact We incorporate FY18 earnings and management s fresh guidance into our forecasts. This results in: 1) lower DCRs for Drilling fleet, 2) higher O&G production volumes, and 3) increase in E&C orderbook replenishment assumption. Also, we change our FY19E-20E ringgit assumption to USD/MYR assumption to 4.00 (previous: 4.15) and introduce FY21 earnings forecast. As a result, our FY19/20 forecasts are revised to RM102mn loss/rm121mn profit (previous: RM301mn loss/rm252mn loss). Valuation There is immense monetization potential for SAPE s E&P assets, on the back of the nascent recovery of oil prices. To recap, SAPE has a treasure trove of O&G net reserves and resources totalling 253mn boe. A new gas field, B10 SK310 started production in Oct-17, and development of SK408 Phase 1 is currently in progress (target 1st gas: CY19/20). Meanwhile, EBITDA oil breakeven price for PM323 remains low at USD30-35/bbl. All this translates to immediate robust cashflow generation, and earnings visibility over the longer term. Additionally, when SAPE proceeds to field development for B14 SK310 and SK408 (Gorek & Larak), this will provide orderbook opportunities for internal E&C operations. A key rerating catalyst would be the potential separate listing for the group s E&P assets. Recall that in Jan-18, SAPE confirmed media reports that the group has engaged advisors to evaluate and advise on this exercise. Assuming SAPE unlocks its E&P assets at attractive valuations, we expect significant cash proceeds to be raised. In turn, this would strengthen SAPE s balance sheet, and ease working capital and capex requirements. We believe the benefits would more than offset the impact of diluted E&P profits. However, given protracted earnings weakness for the Drilling and E&C segments, we do not discount the possibility of more impairments for SAPE s assets, trade receivables, goodwill etc. Therefore, we believe that a more accurate reflection of SAPE s book value should include discounts on the latter. As such, we arrive at a revised target price of RM0.65 (previous: RM1.25), based on 0.6x CY18 Adjusted P/B (previous: 0.6x CY18 P/B) of RM1.09/share. We maintain Buy, mainly due to favourable risk-return, and because SAPE is a proxy to oil price recovery via its E&P crown jewel assets. Page 3 of 5

4 29-Mar-18 Table 1: Earnings Summary (RMmn) FYE J an (RM mn) E 2020F 2021F R evenue 7, , , , ,927.1 E BITDA 2, , , , ,540.1 E BITDA ma rg in (% ) P reta x P rofit (2,323.6) R eported Net P rofit (2,503.5) (102.0) Core Net P rofit (299.8) (102.0) Core E P S (s en) 6.7 (5.0) (1.7) Core E P S growth (% ) (60.3) (175.1) (66.1) (219.0) 80.4 Core P E R (x) 7.4 (9.9) (29.3) DP S (s en) Dividend Yield (% ) Table 2: FY18 Results Analysis FYE 31 J an 4Q18 3Q18 QoQ% 4Q17 YoY YTD FY18 YTD FY17 YoY Revenue 1, ,280.0 (7.1) 1,812.8 (34.4) 5, ,651.3 (23.0) Core EBITDA 2, > >100 1, ,688.4 (44.1) E B ITDA Marg in Deprecia tion (243.9) (270.7) (9.9) (312.9) (22.1) (1,062.0) (1,792.1) (40.7) Net Interest Inc (204.9) (219.4) (6.6) (215.4) (4.9) (837.3) (776.1) 7.9 S ha re of J CE s > (61.4) (39.5) E xceptiona ls (2,209.1) (68.3) >100 (227.9) >100 (2,203.7) (191.9) >100 Core Pretax Profit (38.8) (141.4) (72.6) >-100 (119.9) >-100 Ta xa tion (34.4) (65.5) (47.5) (47.6) (27.8) (181.2) (179.1) 1.2 Minority Interests (0.6) > (37.6) Core Net Profit (72.3) (206.1) (64.9) >-100 (299.8) >-100 Reported Net P rofit (2,285.5) (274.4) > >-100 (2,503.5) >-100 Core E P S (sen) (1.2) (3.5) (65.0) 5.7 >-100 (0.1) 0.1 >-100 DP S (sen) nm 1.0 nm nm Page 4 of 5

5 29-Mar-18 Table 3: FY18 Segmental Analysis FYE 31 J an (RMmn) 4Q18 3Q18 QoQ% 4Q17 YoY FY18 FY17 YoY Revenue E &C (18.5) 1,156 (42.0) 3,956 4,544 (12.9) Drilling (8.3) 397 (42.0) 1,146 2,019 (43.3) E nerg y 286 1,280 (77.6) ,121 (24.1) Corpora te & E lim 2 (1) >-100 (15) >-100 (57) (32) 76.9 Total 1,189 1,280 (7.1) 1,813 (34.4) 5,895 7,651 (23.0) Adjus ted Pretax Profit* E &C (22) 17 > > (45.7) Drilling (52) (93) (43.9) 3 >-100 (210) 239 >-100 E nerg y 26 9 > (63.7) Corpora te & E lim (80) (96) (16.8) (287) (72.2) (320) (258) 24.0 Total (128) (164) (22.0) (125) 1.8 (145) 621 >-100 Adjus ted Pretax Profit Margin* E &C -3% 2% 7% 8% 12% Drilling -23% -37% 1% -18% 12% E nerg y 9% 4% 27% 10% 7% Group -11% -13% -7% 14% 8% * E xcludes one-off as s et impairments /write-backs, but includes F X impact [THE REMAINING OF THIS PAGE IS INTENTIONALLY LEFT BLANK] Stock Recommendation Guideline BUY : Total return within the next 12 months exceeds required rate of return by 5%-point. HOLD : Total return within the next 12 months exceeds required rate of return by between 0-5%-point. SELL : Total return is lower than the required rate of return. Not Rated: The company is not under coverage. The report is for information only. Total Return is defined as expected share price appreciation plus gross dividend over the next 12 months. Gross dividend is excluded from total return if dividend discount model valuation is used to avoid double counting. Required Rate of Return of 7% is defined as the yield for one-year Malaysian government treasury plus assumed equity risk premium. Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy and/ or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. As of Thursday, March 29, 2018, the analyst, Kylie Chan Sze Zan, who prepared this report, has interest in the following securities covered in this report: (a) nil Kaladher Govindan Head of Research TA SECURITIES HOLDINGS BERHAD (14948-M) A Participating Organisation of Bursa Malaysia Securities Berhad Menara TA One 22 Jalan P. Ramlee Kuala Lumpur Malaysia Tel: Fax: Page 5 of 5