PERHAPS this is the case of something is always better than nothing for Sapura Energy Bhd even if there is no assurance that ‘the something’ can promise a handsome return on investment (ROI).
Yesterday (June 16), the global integrated oil & gas (O&G) outfit announced that its wholly-owned subsidiaries and joint ventures have been awarded contracts with combined values of approximately RM2.7 bil, including RM176 mil contributed by its joint venture company.
Consisting of two jobs in engineering & construction (E&C) as well as two drilling contracts which involves deployment of four drilling rigs, this marks the first batch of contract wins in FY1/2023 for the group.
While these contract wins are undoubtedly positive as it ensures visibility to the group’s topline numbers for the next few years (at least till CY2025), their contribution to earnings are still uncertain at this juncture.
“(This is) given the group’s potentially limited flexibility in project execution amid the current challenging operating environment and tight financials especially at the early stage of commencement,” justified PublicInvest Research’s analyst Nurzulaikha Azali in a company update.
“Although efficiency on project execution and profit margins are still uncertain at this juncture given the challenging operating environment and the group’s tight financials, we think the new award provides better outlook given its focus on areas of Sapura’s core strength where it has competitive advantages, hence giving it better pricing which also assumes higher logistic costs.”
With the contract wins, PublicInvest Research expects Sapura’s outstanding order book to be at a relatively healthy RM8 bil while the group’s drilling segment is expected to increase its asset utilisation rate from the current eight rigs in operation to 11 rigs by end-FY1/2023.
“For E&C, the projects are expected to yield margins in a range of 15%-17% at gross level while for the drilling contract, EBITDA (earnings before interest, taxes, depreciation, and amortization) margin would be in the 40% region,” projected the research house.
“No change to our forecast having assumed this in our order book replenishment assumption of RM4 bil. Tender book stands at circa RM25 bil though its financial constraints may limit its ability to undertake more projects.”
All-in-all, PublicInvest Research reiterated its “neutral” rating on Sapura with an unchanged target price of 5 sen.
At 9.02am, Sapura was unchanged at 5 sen with 44.64 million shares traded, thus valuing the counter at RM799 mil. – June 17, 2022
