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Nikkei Markets

Sapura Energy aims to expand orders in hand in second-half

Analysts doubt prospects of quick return to profit as thin margin weighs

KUALA LUMPUR (Nikkei Markets) -- Malaysian oil and gas services firm Sapura Energy is aiming to swell its orders in hand by three billion ringgit ($729.14 million) in the fiscal second half to Jan. 31, although analysts said thin margins at fresh contracts make it challenging for the company to turn profitable anytime soon despite robust revenue growth.

"Our orderbook should be around 17 billion ringgit-and-18 billion ringgit. But an order book of 21 billion ringgit-to-22 billion ringgit would be comfortable," Chief Executive Shahril Shamsuddin said at a news conference.

The company is currently bidding for renewable energy contracts in Europe, and is exploring opportunities in wind farm segment, which is expected to contribute between 10% and 15% of revenue in the next few years, he said.

While Shahril is confident of the company's three core businesses to be in the green in the next 12 months, analysts, wary of margin pressure, doubt such bullish outlook.

"They can have robust order book replenishment but if the margins are thin, it is still difficult for the company to turnaround," Midf research analyst Noor Athila Mohd Razali said.

With low charter rates, the drilling business is especially challenging and she does not expect it to turn profitable in the near-term.

Profit from engineering and construction segment, where margin is in "low single-digit", is not sufficient to offset losses at the other two core businesses - drilling, and exploration and production - she added.

Sapura's earnings have been under pressure since financial year 2016 even as the industry recovered from a precipitous fall in crude oil prices. The company's net loss for the fiscal first quarter narrowed to 109.10 million ringgit from 135.73 million ringgit a year earlier, partly due to higher other operating income and gain on disposal of property, plant and equipment as well as foreign exchange gain. Quarterly revenue grew 93.2% on year to 1.63 billion ringgit from 845.17 million a year earlier.

Shahril said gross margin is expected to remain at the current level as assets are still under-utilized. "We have gone through three years of conditioning from our clients. They are pressing down the prices and margins and are not going to let it go easily," he added. "Only if assets are being soaked up, we will see upward movements in margins."

Analysts expect performance at Sapura's engineering and construction division to improve but progress will likely be slow.

"We are expecting quarter-on-quarter improvement in the second quarter. The company will still incur losses but it will narrow," said Sean Lim, analyst at Hong Leong Investment Bank. "As for the second half, margin at its engineering and construction business is expected to improve and utilization rate for its drilling assets will see gradual recovery."

For its exploration and production division, Lim expects the SK408 gas fields to start contributing from 2019-end but the impact on profit will only be seen next financial year.

"It is more likely for Sapura Energy to breakeven in the second half for the fiscal year ending Jan. 31, 2021," he said.

Shares of Sapura Energy, which have shed 49% over the past 12 months, fell 1.6% to end at 0.30 ringgit apiece, while the benchmark FBM KLCI closed 0.5% down.

--Yimie Yong

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