Surprises continue as Sapura picks itself up

KUALA LUMPUR (October 1): Shareholders of Sapura Energy Bhd may have to have strong hearts to handle surprises, both positive and negative.

The oil and gas (O&G) group last Friday announced that it had posted a net loss of RM126.06 million for the second financial quarter ended July 31 (2QFY19), compared to a net profit of RM28.93 million a year ago, at the time when shareholders have gotten more optimistic that Sapura Energy’s whopping debts and high gearing will be the past in FY20 ending Jan 31, 2020 given its proposed cash call and divestment of a 50% stake in its upstream unit. Quarterly revenue dropped nearly 24% year-on-year to RM1.26 billion from RM1.66 billion.

The group has been loss-making for four consecutive quarters. This begs the question: Are there any more surprises in the pipeline?

Over the past two months, Sapura Energy has often been featured in news headlines. It proposed a massive RM4 billion cash call in August and then the announcement that it had found a buyer, OMV Aktiengesellschaft, for a 50% stake in its upstream business that could fetch a price of US$800 million (RM3.31 billion).

“The losses were larger than expected,” Kenanga Research analyst Sean Lim told The Edge Financial Daily.

According to Lim, Sapura Energy guided that several major assets were underutilised in the quarter under review.

The oil firm explained in a statement that the lower utilisation seen was because some projects had been completed, adding that its assets were in the pre-mobilisation stage for newer projects “in early execution phases”.

The two factors combined brought a “poor mix of margins” for the company, said Lim. “I would say this round, the [operating] costs were also slightly higher.”
For the first half of FY19, Sapura Energy booked a net loss of RM261.79 million, compared to a profit of RM56.46 million last year.

Revenue shrank by a third to RM2.31 billion from RM3.43 billion, “in line with lower activities during the current period”.

Earnings will gradually pick up for the company in the coming quarter, Lim told The Edge Financial Daily, but not substantial enough for a decent profit.

“It takes about six months for earnings to improve for the engineering and construction (E&C) segment,” he explained. He expects Sapura Energy to book another two loss-making quarters.

Nonetheless, Lim shared some optimism from the clearer direction available for Sapura Energy. Importantly, the group has managed to secure its substantial shareholder Permodalan Nasional Bhd’s undertaking to subscribe to 40% of its rights shares.

Meanwhile, the group has also garnered an enterprise value of US$1.6 billion for its upstream business parked under wholly-owned Sapura Upstream Sdn Bhd, 50% of which is being acquired by Austrian O&G group OMV AG.

With the sale of 50% of Sapura Upstream, Sapura Energy could get its hands on US$800 million cash, although no deadline has been given by the companies involved to finalise the deal.

“It is positive for them (Sapura Energy) to deleverage and strengthen their balance sheet, as well as to raise capital for future works and further improve their position,” said Lim.

“The better prospects and higher work orders ahead should mitigate the poor sentiment towards the counter amid these short-term challenges,” he added. “Things are improving.”

However, Lim opined that while Sapura Energy had clarified that there had been no impairment as of now, there could still be some smaller exceptions “here and there”.

The company’s last massive impairment was for 4QFY18, which totalled RM2.13 billion.

Shareholders could also keep an eye on Sapura Energy’s margins moving forward.

Analysts are largely expecting Sapura Energy’s net margin to remain in negative territory in FY19 before it recovers in the following financial year. The group has guided for its engineering and construction operating profit margin to average at high single digits for the whole of FY19.

Up until Sept 26 when Sapura Energy secured undertakings from major shareholders for the RM4 billion cash call, the counter had garnered nine “add” calls, six “hold” calls and two “sell” calls, Bloomberg data show. Target prices ranged from as low as 30 sen to a high of RM1.20.

Sapura Energy was the most traded counter on Bursa Malaysia with 162.36 million shares done last Friday. It dropped by 1.5 sen to close at 41 sen, with a market capitalisation of RM2.61 billion.

It will be interesting to see whether analysts revise their calls on the group following the latest quarterly financial results.

This article first appeared in The Edge Financial Daily, on Oct 1, 2018.

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