Sapura Energy SAPE MK Sector: Oil & Gas

Transcription

1 Still cautious Despite the 76% decline in SAPE s share price over the past 12 months, we believe it is still too early to revisit the stock. Downside risks remain from potential impairment, negative earnings surprises, uncertainty over orderbook replenishment, weak cashflows and potential listing of its E&P division that could eventually veer interest away from SAPE. Speculations of SAPE being removed from MSCI Malaysia index as a result of its market cap size may also pose some downside risk to the share price as foreign shareholding stood at 21% (as of end Jan-18). Maintain SELL with new RM0.40 target price. E&P listing - a double-edged sword SAPE s recent announcement of a potential listing of its exploration and production (E&P) business is positive in the long-run, in our view, as it would allow the group to unlock value and not be dragged down by the existing 2 business segments. However, this deal also works as a doubleedged sword as we believe if carved out completely, the left-over SAPE would lose its appeal to many existing investors who believe in the monetization potential of its gas fields. Although still at an early stage, any move towards carving out the E&P division entirely for a separate listing, may therefore not be value accretive to the currently listed SAPE. Concerns over E&C and drilling The market s biggest concern is regarding the outlook of its E&C and drilling divisions. Earnings have been on a declining trend with the drilling division falling into losses due to low rig utilization. While oil price has been trending upwards, oil majors capex remains lacklustre. As such, we believe that order book replenishment risks will continue to be investors main concern. Recommend taking profit ahead of results We cut our FY19E EPS forecast by 25%, but raise FY20E by 18% as we pencilled in a stronger RM and Brent oil assumption. We have revised our valuation methodology from SOP to P/NTA as the former is no longer viable due to expected losses. Reiterate SELL with a new target price of RM0.40 (from RM0.73) based on 0.6x FY19E NTA. Key upside risks include a recovery in contract wins, work activities and higher-thanexpected drilling rig utilization. Earnings & Valuation Summary FYE 31 Jan 2016A 2017A 2018E 2019E 2020E Revenue (RMm) 10, , , , ,569.2 EBITDA (RMm) 3, , , , ,551.5 Pretax profit (RMm) (712.6) (217.7) (179.2) 45.7 Net profit (RMm) (791.6) (368.0) (266.8) 40.8 EPS (sen) (13.3) 3.5 (6.2) (4.5) 0.7 PER (x) n.m 14.6 n.m n.m 74.6 Core net profit (RMm) (368.0) (266.8) 40.8 Core EPS (sen) (6.2) (4.5) 0.7 Core EPS growth (%) (70.3) (32.0) (257.0) Core PER (x) n.m n.m 74.6 Net DPS (sen) Dividend Yield (%) EV/EBITDA (x) Company Update Sapura Energy SAPE MK Sector: Oil & Gas 8 March 2018 SELL (maintain) Downside: 22% Price Target: RM0.40 Previous Target: RM0.73 (RM) Mar-15 Aug-15 Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 Feb-18 Price Performance 1M 3M 12M Absolute -27.1% -38.6% -74.9% Rel to KLCI -27.1% -42.5% -76.4% Stock Data Issued shares (m) 5,992.2 Mkt cap (RMm)/(US$m) 3,056/781.9 Avg daily vol - 6mth (m) wk range (RM) Est free float 55.8% BV per share (RM) 2.04 P/BV (x) 0.25 Net cash/ (debt) (RMm) (3Q18) (15,461) ROE (2019E) n.m Derivatives Nil Shariah Compliant Yes Key Shareholders Sapura Holdings 15.9% EPF 6.6% KWAP Source: Affin Hwang, Bloomberg 6.3% Tan Jianyuan, ACCA (603) Jianyuan.tan@affinhwang.com Chg in EPS (%) (2.2) (25.3) 18.2 Affin/Consensus (x) , Affin Hwang forecasts, Bloomberg Page 1 of 9

2 Impairment risk in 4Q Keep an eye on impairments The final quarter of the financial year is normally a period when companies engage in kitchen sinking exercises, and investors will be watching closely for possible impairments. Over the past 2 years, SAPE has impaired a total of RM1.4bn on the O&G field, RM562m on the drilling rigs and RM326m on the E&C assets. With the recent recovery in global oil price to c.us$70/bbl, we believe the impairment exercise in 4Q will focus more on the latter two assets (E&C and drilling). Fig 1: Historical impairment exercise RMm O&G Properties Drilling Engineering & Construction 1,400 1,200 1, QFY16 3QFY16 4QFY16 4QFY17 Utilisation and DCR hit lows Prior to the 2014 oil price crisis, rates for tender and semi tender rigs were around US$130k-140k/day and US$180k-190k/day, respectively. As rates for both types of rig declined, SAPE booked a total of RM401m impairment on the rigs in FY16. Rigs utilisation rates were at c.50%. However, utilisation rates have worsened since then, declining to a low of 33% since mid We believe this situation will likely trigger another round of impairments in the upcoming 4Q results. Page 2 of 9

3 Fig 2: Status of drilling rig Status (as at end Rig March 2018) Status (as at Firm contract Contract Water Drilling Known client December 2016) expiry tenure depth (ft) depth (ft) SKD T-9 Drilling Drilling Petronas Carigali 2Q years 6,000 30,000 SKD T-17 Drilling Drilling PTTEP n.a n.a 6,000 20,000 SKD T-18 Drilling Drilling Chevron 3Q19 5 years 6,000 20,000 SKD Pelaut Drilling Drilling Brunei Shell Petroleum 3Q years 6,500 30,000 SKD Esperanza Drilling Drilling Sarawak & Sabah Shell by 3Q months 6,500 30,000 SKD T-10 Stacked Drilling Petronas Carigali 3Q years 6,500 30,000 SKD T-12 Stacked Drilling Chevron 3Q19 5 years 6,500 30,000 SKD Berani Stacked Drilling JX Nippon early 1Q17 Min 150 days 6,500 30,000 SKD Teknik Berkat Sold Ready stacked ,000 30,000 SKD T-11 Stacked Ready stacked ,500 30,000 SKD T-19 Stacked Ready stacked ,000 SKD T-20 Stacked Ready stacked ,000 20,000 SKD Jaya Stacked Ready stacked ,500 30,000 SKD Alliance Stacked Ready stacked Brunei Shell Petroleum April 18 - Mar years 6,500 30,000 SKD Setia Stacked Ready stacked ,000 30,000 SKD Menang Stacked Ready stacked ,500 30,000 SKD Kinabalu Under construction Under construction 6,000 25,000 SKD Raiqa Under construction Under construction 6,500 n.a, Rigzone Goodwill from merger and Seadrill To recap, SAPE completed a few acquisitions in recent years, which saw its non-current assets expanded. SAPE purchased Seadrill tender and semi tender rigs business for US$2.6bn in April 2013, resulting in the book value increasing from RM2bn in 2012 to RM10.6bn in It subsequently acquired Newfield s O&G blocks in Malaysia and now has a RM4.4bn expenditure on O&G properties on the book. SAPE is currently sitting on RM8.5bn of goodwill post completion of the Sapura Crest and Kencana Petroleum merger and acquisition of Seadrill. Fig 3: Book value of respective assets RMbn Tender rigs Goodwill O&G Properties A 2014A 2015A 2016A 2017A Page 3 of 9

4 Possible impairment on goodwill if situation do not improve We believe the impairment on goodwill is a wildcard. With the sharp decline in global oil prices and oil majors cutting down on capex over the past few years, this would have negatively affected the assets future cash flows. We do not rule out the possibility of an impairment on the goodwill in the near future, in the event where current situation (ie: rigs utilisation) show no signs of improvement. Business update: Brazil helming the ship Fig 4: Details on order book Steady profit from Brazil The current outstanding order book stands at RM15.1bn. Its joint venture operation in Brazil with Seadrill (50:50 stake) makes up 60% of the total current order book. The JV company will provide 6 pipe laying support vessels (PLSV) to Petrobras for a period of 5 and 8 years, respectively (3 for each period), with an option to extend for the same number of years. Based on our understanding and estimates, the Brazil operation generates close to RM95 100m net profit every quarter. Viewing the entire business as a whole, the Brazil operation provides a more stable revenue stream. Fig 5: Healthy utilisation rate for the Brazil operation Page 4 of 9

5 Challenging E&C and drilling Fig 6: Order book breakdown (by segment) as of 31 Oct 17 Brazil JV E&C Drilling Drilling, 12% (RM1.8bn) E&C, 28% (RM4.3bn) Brazil JV, 60% (RM9bn) Cut in industry capex hurt E&C and drilling Both E&C and drilling segments posted its weakest revenue in 3QFY18, since Business outlook has been challenging due to cuts in capital spending by oil majors globally. For 4QFY18, we expect a weaker performance from both segments and anticipate the E&C segment to generate losses, while the drilling segment continues to be in the red as utilisation rates continue to see no signs of improvement qoq. Fig 7: E&C and drilling revenue Fig 8: E&C and drilling PBT RMm 2,000 E&C Drilling RMm E&C Drilling , , QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18, Affin Hwang, Affin Hwang Page 5 of 9

6 Higher oil price provides upside for Energy Done with B15 field, next: SK408 and B14 Development of the B15 gas field was completed in October 2017 and delivered first gas by November 2017, totalling 100mmscfd. We understand that management managed to bring down total development cost by around 40% to US$170m. Following the completion of this, SAPE will focus on developing its SK408 field, which has much bigger natural resources to be monetised. Management s internal target is to achieve first gas by E&P listing works as a double edge sword The recent announcement of a potential listing of its exploration and production (E&P) business is positive, in the long run as it would allow the group to unlock value and not be dragged down by the existing 2 business segments. We gather that the proposed listing is not to fund the future development in any way, but rather to enhance shareholder value. However, in our view, this deal also works as a double-edged sword as we believe if carved out completely, the left-over SAPE would lose its appeal to many existing investors who believe in the monetization potential of its O&G fields. While still at an early stage with limited details on whether the E&P division will be entirely carved out for a separate listing, we think that there may be downside risk to SAPE, if it materialises. Negative cash flows - a red flag Fig 9: Negative free cash flow in 3QFY18 RM'm OCF FCF 1,500 1, (500) (1,000) (1,500) 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 Negative FCF and OCF net of interest expense In its 3QFY18 results, SAPE recorded a negative operating cash flow (OCF) of RM200m, and an even bigger negative free cash flow of RM1.13bn. However, what is more alarming to us is that that operating cash flow after finance cost is in a negative territory (Fig 10). Should the business outlook not improve, cash levels might deteriorate further and thus may face the risk of future debt refinancing. Page 6 of 9

7 Fig 10: Insufficient OCF to even cover finance cost RM'm OCF Finance cost Net OCF 1,200 1, (200) (400) (600) 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 Tweak earnings on revised USD/RM and oil price assumption We are revising our EPS forecast mainly to factor in our new end-2018 RM assumption at RM3.80/US$ (from RM4.05) and our higher Brent assumption to US$65/bbl in 2018 and US$75/bbl for the longer-term. As a result, we cut our FY19E EPS by 25% (-RM53m) but raise our FY20E EPS forecast by 18% (+RM6m). Order book replenishment target remains unchanged at RM4bn. Maintain SELL; lower target price We change our valuation methodology to P/NTA basis compared to SOP previously, as the latter is no longer viable due to the anticipated losses. Our revised target price of RM0.40 (from RM0.73) is based on 0.6x P/NTA applied to our FY19E NTA. We reiterate our SELL given 1) high risk of impairments, 2) rich valuation, 3) risks on orderbook replenishment for both E&C and rigs; and 4) critical operating cash flow, which is insufficient to cover the high interest expenses. Page 7 of 9

8 SAPE FINANCIAL SUMMARY Profit & Loss Statement Key Financial Ratios and Margins FYE 31 Jan (RMm) E 2019E 2020E FYE 31 Jan (RMm) E 2019E 2020E Revenue 10,184 7,651 5,978 5,917 6,569 Growth Operating expenses -7,064-5,129-4,745-4,614-5,018 Revenue (%) EBITDA 3,120 2,523 1,232 1,303 1,552 EBITDA (%) Depreciation -1,409-1,792-1,000-1,087-1,145 Core net profit (%) EBIT 1, Net int income/(expense) Profitability Exceptional gains / (losses -1, EBITDA margin (%) Associates' contribution PBT margin (%) Pretax profit Net profit margin (%) Tax Effective tax rate (%) Minority interest ROA (%) Net profit Core ROE (%) Core net profit ROCE (%) Dividend payout ratio (%) Balance Sheet Statement FYE 31 Jan (RMm) E 2019E 2020E Liquidity Fixed assets 14,906 15,140 15,501 15,014 14,469 Current ratio (x) Other long term assets 14,758 15,002 15,161 15,522 15,883 Op. cash flow (RMm) 2,045 2, Total non-current assets 29,664 30,142 30,663 30,536 30,352 Free cashflow (RMm) 1,374 1, Cash and equivalents 1,948 3,520 2,770 1, FCF/share (sen) Stocks Debtors 4,114 3,234 2,620 2,351 2,610 Asset management Other current assets Debtors turnover (days) Total current assets 6,828 7,308 5,887 4,660 4,078 Stock turnover (days) Creditors 4,339 3,766 3,296 3,272 3,526 Creditors turnover (days) Short term borrowings 2,091 3,511 3,511 3,511 3,511 Other current liabilities Capital structure Total current liabilities 6,545 7,329 6,859 6,835 7,090 Net gearing (%) 134% 116% 126% 128% 128% Long term borrowings 16,238 15,136 15,136 14,136 13,136 Interest cover (x) Other long term liabilities 1,496 1,904 1,904 1,904 1,904 Total long term liab. 17,734 17,039 17,039 16,039 15,039 Shareholders' Funds 12,207 13,076 12,648 12,321 12,302 Quarterly Profit & Loss Minority Interest FYE 31 Jan (RMm) 3Q17 4Q17 1Q18 2Q18 3Q18 Revenue 2,222 1,813 1,770 1,656 1,280 Cash Flow Statement Operating expenses -1,689-1,329-1,326-1, FYE 31 Jan (RMm) E 2019E 2020E EBITDA Pretax Profit Depreciation Depreciation & amortisatio 1,409 1,792 1,000 1,087 1,145 EBIT Working capital changes Int expense Cash tax paid Associates' contribution Others 2, Exceptional items C/F from operation 2,045 2, Pretax profit Capex , Tax Others Minority interest C/F from investing , Net profit Debt raised/(repaid) ,000-1,000 Core net profit Dividends paid Others Margins (%) C/F from financing ,060-1,060 EBITDA Net change in cash flow 585 1, PBT 9.0 (6.9) (12.2) Net profit 7.1 (9.5) (17.3) Free Cash Flow 1,374 1, , Affin Hwang forecasts Page 8 of 9

9 Important Disclosures and Disclaimer Equity Rating Structure and Definitions BUY Total return is expected to exceed +10% over a 12-month period HOLD Total return is expected to be between -5% and +10% over a 12-month period SELL Total return is expected to be below -5% over a 12-month period NOT RATED Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as a recommendation The total expected return is defined as the percentage upside/downside to our target price plus the net dividend yield over the next 12 months. OVERWEIGHT Industry, as defined by the analyst s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months NEUTRAL Industry, as defined by the analyst s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months UNDERWEIGHT Industry, as defined by the analyst s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months This report is intended for information purposes only and has been prepared by Affin Hwang Investment Bank Berhad (14389-U) ( the Company ) based on sources believed to be reliable. However, such sources have not been independently verified by the Company, and as such the Company does not give any guarantee, representation or warranty (express or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or rendered in this report. Facts, information, views and/or opinion presented in this report have not been reviewed by, may not reflect information known to, and may present a differing view expressed by other business units within the Company, including investment banking personnel. Reports issued by the Company, are prepared in accordance with the Company s policies for managing conflicts of interest arising as a result of publication and distribution of investment research reports. Under no circumstances shall the Company, its associates and/or any person related to it be liable in any manner whatsoever for any consequences (including but are not limited to any direct, indirect or consequential losses, loss of profit and damages) arising from the use of or reliance on the information and/or opinion provided or rendered in this report. Any opinions or estimates in this report are that of the Company, as of this date and subject to change without prior notice. Under no circumstances shall this report be construed as an offer to sell or a solicitation of an offer to buy any securities. The Company and/or any of its directors and/or employees may have an interest in the securities mentioned therein. The Company may also make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences and hence an independent evaluation is essential. Investors are advised to independently evaluate particular investments and strategies and to seek independent financial, legal and other advice on the information and/or opinion contained in this report before investing or participating in any of the securities or investment strategies or transactions discussed in this report. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Company s research, or any portion thereof may not be reprinted, sold or redistributed without the consent of the Company. The Company, is a participant of the Capital Market Development Fund-Bursa Research Scheme, and will receive compensation for the participation. This report is printed and published by: Affin Hwang Investment Bank Berhad (14389-U) A Participating Organization of Bursa Malaysia Securities Berhad 22nd Floor, Menara Boustead, 69, Jalan Raja Chulan, Kuala Lumpur, Malaysia. T : F : research@affinhwang.com Page 9 of 9