RESULTS UPDATE

TA Securities A Member of the TA Group

Monday, April 03, 2017
FBM KLCI: 1,740.09
Sector: Oil & Gas
MENARA TA ONE, 22 JALAN P. RAMLEE, 50250 KUALA LUMPUR, MALAYSIA TEL: +603-20721277 / FAX: +603-20325048
R

Sapura Energy Bhd TP: RM2.02 (+11%)

Sailing in Uncertain Waters Last Traded: RM1.82
THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* Hold
Kylie Chan Sze Zan Tel: +603-2167-9601 kyliechan@ta.com.my www.taonline.com.my

Share Information
Review
Bloomberg Code SAPE MK

Sapura Energy Bhd (SEB) reported FY17 core net profit of RM396mn (- Stock Code 5218
Listing Main Market
61% YoY). This was above expectations, accounting for 130% and 120%
Share Cap (mn) 5,992
of our full-year forecast and consensus. The variance was mainly due to Market Cap (RMmn) 10,906
higher-than-expected contribution from the drilling segment, Petrobras Par Value (RM) 1.00
contracts, and Sapura 3000. In addition, oil production 4.1mn boe (FY16: 52-wk Hi/Lo (RM) 2.09/1.29
12-mth Avg Daily Vol ('000 shrs) 14,814
4.8mn boe) and cost savings surpassed our expectations.
Estimated Free Float (%) 25

FY17 headline net profit of RM204mn includes:- 1) net FX gain of Beta 3.14
Major Shareholders (%)
RM44mn, 2) writeback in provisions of RM1.2mn for O&G fields, 3) asset Sapura Holdings - 16.8
impairments for Drilling (RM161mn) and E&C (RM123mn), and 4) impact STSB - 15.9
from cessation of Berantai RSC (estimate: RM47mn). EPF - 11.3
Khasera - 10.1

Total asset impairments of RM1.1bn nearly halved compared to a year ago
(FY16: RM2.0bn). This is reflective of an improved oil price environment. Forecast Revision (%)
FY18 FY19
Note that the current book value of SEB’s O&G assets incorporate oil price
Forecast Revision (%) 13 4
assumption of less than USD45/bbl. Therefore, there is a possibility of Core Net Profit (RM mn) 313.7 468.1
write backs moving forward. Consensus 267.1 509.4
TA/Consensus (%) 117 92

We deem FY17 results as resilient, particularly when compared to SEB’s Previous Rating Hold (Maintained)
peers. We attribute this largely to:- 1) increased contribution from
Petrobras pipelaying contracts (~RM280mn), as the 6th and final vessel Scorecard
% of FY
was delivered in Aug-16, and 2) cost savings of circa RM800mn (with
vs TA 130 Above
management pushing for an additional RM200mn in FY18). To a lesser vs Consensus 120 Above
extent, bottomline was boosted by one-off reimbursement from Berantai
RSC (ceased: 2QFY17), which is estimated at RM37mn (net of tax). Financial Indicators
FY18 FY19

Accordingly, the lower costs were reflected in:- 1) current high EBITDA Net Debt/Equity (%) 103.4 93.2
margin of ~50% for working rigs, and 2) lower EBITDA oil breakeven ROA (%) 0.8 1.3
ROE (%) 2.4 3.4
price of USD30-35/bbl in FY17 (FY16: less than USD50/bbl). The cost
NTA/Share (RM) 2.2 2.3
measures more than offset lower oil production and lifting price (FY17: P/NTA (x) 0.8 0.8
USD46/bbl, FY16: USD52/bbl). According to management, SEB is the
lowest cost oil producer in Malaysia. Additionally, cost savings also Share Performance
Price Change (%) SAKP FBMKLCI
partially cushioned profit decline at the Drilling segment, which suffered
1 mth (7.6) 1.9
from a drop in fleet utilization. 3 mth 8.3 6.4
6 mth 15.9 5.3

SEB declared FY17 DPS of 1 sen (FY16: 1.4 sen), which was above our 12 mth (3.7) 1.7
expectations.
(12-Mth) Share Price relative to the FBM KLCI
Key Takeaways from Analyst Briefing

General:
1) Management maintained its subdued outlook on oil price and the
industry environment. SEB expects oil price to average at USD55/bbl in
2017, and opined that it is unlikely to breach USD60/bbl in 2017-18.
Meanwhile, as a desperate measure to lock-in contracts, competitors are
still ‘throwing prices’, even at loss-making rates. Therefore, management
alluded that “the worst is not over”.
2) Outstanding orderbook of RM16.7bn (including JVs) slipped 22% YoY Source: Bloomberg
versus FY16 (RM21.3bn). About one-thirds of the total will be recognized

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 TA Securities
A Member of the TA Group 3-Apr-17
in FY18. Meanwhile, tenderbook amounts to USD7bn.
3) Stable new order wins of RM6.3bn in FY17 (FY16: RM6.2bn) was
commendable. This was in spite of a competitive environment, coupled
with lower capex spend (-14% YoY) by global oil majors in 2016. The
bulk of secured contracts originate from SEA (76%).
4) SEB expects higher capex in FY18 after subdued spend in FY17
(RM390mn). This will be largely driven by residual development costs for
B15 and to a lesser extent, for SK408. Capex will also be expensed for a 7-
well campaign that includes infill drilling at PM323, and 2-3 exploration
wells at SK408.

Balance Sheet:
1) SEB’s balance sheet improved in FY17, underpinned by:- (i) net
gearing: 1.2x (FY16: 1.3x), (ii) cash: RM3.5bn (FY16: RM1.9bn), (iii)
Operating CF: RM3bn (FY16: RM2.6bn).
2) Robust operating cash flow enabled SEB to finance FY17 capex via
internal cash, without the need to draw down on debt facilities.
3) We understand that interest rates remain unchanged for the Mar-17
refinancing of RM1.1bn in short term (ST) debt to long term Sukuk
Murabahah. Current ST Debt/Total Debt ratio remains manageable at
0.2x.
4) Cash levels will receive a boost in Jun-17, when SEB receives its final
payment tranche (USD63mn) from Petronas for reimbursement of
Berantai RSC’s cessation.

Drilling:
1) Currently, SEB has 8 out of 16 rigs working. Current fleet utilization of
50% will improve slightly, following commencement of SKD Alliance’s
5+5 year contract with Shell Brunei in Apr-18.
2) In the worst case scenario, according to management, only 5 rigs will
be chartered out by end-FY18. Nevertheless, management expects fleet
utilization levels to hover at circa 50% in FY18-19. This is underpinned by
2-3 prospective bids in FY18 at SEA and Africa.
3) Management acknowledged that jack-up rigs are now competing in the
medium water space traditionally occupied by tender rigs. However, in
management’s defense, jackups are primarily deployed to drill
exploration wells, whereas tender rigs are used for development wells.
Additionally, tender rigs have managed to penetrate the deepwater
market. This is evident from the upcoming deployment of SKD Esperanza
to Malikai field.
4) On the bright side, DCRs appear to have bottomed out and stabilized
since 1QCY16, at current levels of USD70K-90K (tender barge), and
USD120K-150K (semi tenders).

Energy:
1) Development of SK310 B15 gas field is on track for 1st gas in Oct-17.
Production is expected to fully ramp up within a brief period of 1 month
thereafter.
2) After additional discoveries of 3 tcf from SK408, SEB’s total net
reserves and resources has increased to 243mn boe (FY16: 154.5 mn
boe).
3) Despite ballooning O&G reserves that have yet to be monetized, SEB is
still keen to acquire new fields. We are positive on this, given that it
benefits SEB’s internal EPCIC fleet. Recall that the latter is a key
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 TA Securities
A Member of the TA Group 3-Apr-17
beneficiary of E&P jobs dished out by the Energy segment via open
tender.
Impact

Major changes to our earnings forecasts include:- 1) incorporating FY17
unaudited figures, 2) increasing contribution from Brazilian operations
(Sapura Navegacao), 3) lowering depreciation costs due to cessation of
Berantai RSC, 4) increasing E&C order replenishment, and 5) lowering
costs at Energy and Drilling segments. Following this, our FY18/19
forecasts are raised by 13%/5%. Additionally, we introduce FY20
forecast of RM688mn (+46% YoY).

We expect a weaker FY18, underpinned by:- 1) loss of contribution from
Berantai RSC, 2) lower oil production of as per guidance of 3.7mn boe (-
10% YoY), 3) lower drilling fleet utilization, and 4) slowdown in E&C
works, due to completion of projects secured before the oil price
downcycle.

Valuation

We prefer to remain on the sidelines for now, as earnings visibility
remain weak at this juncture. In the near term, the bulk of SAKP’s
current earnings are mainly derived from engineering and drilling.
Contract flows for these segments remain tepid due to:- 1) oversupply
of assets (Feb-17 SEA jackup/tender rigs utilization: 50%/48%), and
2) oil majors are still holding back on capex spend (FY17E: -8% YoY).
Meanwhile, orderbook replenishment lags burn rate.

Whilst oil prices are stabilizing at improved levels, it is unlikely to
stage a V-shaped rally in the near term. This is on the back of:- 1)
ramp-up in US production (YTD:+150k bpd) may prompt Saudi to
arrest production cuts (YTD: -600K bpd) , 2) inventory levels remain
at all-time historical highs amidst YTD build-ups (OECD: +6.5mn bbl,
US: +36.5mn bbl), 3) expectations of high USD Index by Federal
Reserve, 4) possibility that 6-month extension of production cuts at
non-OPEC nations will not be exercised in 2H17, and 5) US rig counts
at shale fields have been progressively inching up since its trough in
May-16 (Jan-17: +19% YoY).

Following the revision in our forecasts, our TP for SEB is now raised to
RM2.02 (previous: RM1.92) based on unchanged 0.9x CY17 P/B. This
implies 28x CY17 P/E (+1.6SD above historical mean). Maintain Hold.

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 TA Securities
A Member of the TA Group 3-Apr-17
Figure 1: Quarterly Results Analysis
FYE 31 Jan 4Q17 3Q17 QoQ% 4Q16 YoY YTD FY17 YTD FY16 YoY
Revenue 1,812.8 2,221.7 (18.4) 2,231.5 (18.8) 7,651.3 10,184.0 (24.9)
Core EBITDA 994.2 510.5 94.7 1,703.5 (41.6) 2,880.4 4,870.4 (40.9)
EBITDA Margin 54.8 23.0 76.3 47.8 47.8
Depreciation (312.9) (262.1) 19.4 (366.3) (14.6) (1,792.1) (1,430.4) 25.3
Net Interest Inc (215.4) (184.9) 16.5 (205.5) 4.8 (776.1) (741.9) 4.6
Impairment Allowances 0.0 0.0 nm 0.0 nm 0.0 (0.9) nm
Share of JCEs 147.5 91.0 62.0 16.7 >100 456.9 190.3 >100
Exceptionals (227.9) 22.3 >-100 (1,228.3) (81.4) (191.9) (1,800.1) (89.3)
Core Pretax Profit 385.3 176.9 >100 (79.8) >-100 577.2 1,087.4 (46.9)
Taxation (47.6) (41.8) 13.9 0.3 >-100 (179.1) (78.8) >100
Minority Interests (0.6) (0.6) (7.0) (0.7) (13.7) (2.2) 0.1 >-100
Core Net Profit 337.1 134.5 >100 (59.3) >-100 396.0 1,008.7 (60.7)

Reported Net Profit 109.2 156.8 (30.4) (1,287.6) >-100 204.0 (791.3) >-100

Core EPS (sen) 5.7 2.3 149.5 (1.0) (669.5) 6.6 16.9 (60.7)
DPS (sen) 1.0 0.0 nm 0.0 nm 1.0 1.4 (25.9)

Figure 2: Segmental Analysis

FYE 31 Jan (RMmn) 4Q17 3Q17 QoQ 4Q16 YoY FY17 FY16 YoY
Revenue
E&C 1,156 1,566 (26.2) 1,073 7.7 4,544 5,646 (19.5)
Drilling 397 460 (13.7) 708 (43.9) 2,019 2,956 (31.7)
Energy 274 2,222 (87.7) 327 (16.2) 1,121 1,600 (29.9)
Corporate & Elim (15) (2) >100 124 (112.0) (32) (17) 83.8
Total 1,813 2,222 (18.4) 2,232 (18.8) 7,651 10,184 (24.9)

Adjusted Pretax Profit*

E&C 85 274 (68.9) 128 (33.6) 558 1,087 (48.7)
Drilling 3 34 (89.9) 112 (96.9) 239 623 (61.6)
Energy 73 2 >100 (14) (618.7) 82 116 (29.4)
Corporate & Elim (287) (111) >100 (306) (6.3) (258) (418) (38.3)
Total (125) 199 >-100 (80) 56.9 621 1,408 (55.9)

Adjusted Pretax Profit Margin*

E&C 7% 17% 12% 12% 19%
Drilling 1% 7% 16% 12% 21%
Energy 27% 1% -4% 7% 7%
Group -7% 9% -4% 14% 14%
* Excludes one-off asset impairments/write-backs, but includes FX impact

Figure 3: Earnings Summary

FYE Jan (RM mn) 2015 2016 2017E 2018F 2019F
Revenue 10,184.0 7,651.3 6,806.3 7,438.0 8,974.1
EBITDA 4,870.4 2,880.4 2,419.1 2,493.3 2,680.2
EBITDA margin (%) 47.8 37.6 35.5 33.5 29.9
Pretax Profit (712.6) 385.2 432.7 644.7 949.7
Reported Net Profit (791.3) 204.0 313.7 468.1 687.2
Core Net Profit 1,008.7 396.0 313.7 468.1 687.2
Core EPS (sen) 16.9 6.6 5.3 7.8 11.5
Core EPS growth (%) (16.7) (60.7) (20.9) 49.3 46.8
Core PER (x) 10.8 27.4 34.7 23.2 15.8
DPS (sen) 1.4 1.0 1.0 1.0 1.0
Dividend Yield (%) 0.7 0.5 0.5 0.5 0.5

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 TA Securities
A Member of the TA Group 3-Apr-17

( T HI S P AGE I S I NT E N T I ON AL L Y L E FT B L ANK)

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.
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 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.
for TA SECURITIES HOLDINGS BERHAD(14948-M)
(A Participating Organisation of Bursa Malaysia Securities Berhad)
Kaladher Govindan – Head of Research

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