KUALA LUMPUR: With crude oil prices rebounding significantly in the first quarter of 2019 after plunging in the fourth quarter of 2018, further gains for local oil and gas (O&G) players are likely, according to sector analysts.
Focusing on Sapura Energy Bhd - an active O&G counter in Bursa Malaysia for the past weeks, Maybank IB Research analyst said the stock has a solid long term earnings potential with its beefy RM17.2 billion order book.
The research house said Sapura, despite its core 2019 net profit coming below expectations, turnaround prospects in 2020 and 2021 are looking positive following the conclusion of 50 per cent stake sale of
its energy business and the RM4 billion rights issue.
"Sapura's business is recovering, orders are rising and its financials are improving making Sapura a timely cyclical recovery play," said Maybank IB said in a research note to investors recently.
Sapura swung back to the black posting a net profit of RM208 million for the full financial year ended January 2019 against a staggering net loss of RM2.5 billion in 2018.
The O&G company is on its way to a cyclical recovery as its net gearing stood at a manageable 0.6 times as at end January 2019 after its 50 per cent sale of the energy division.
Maybank IB made a “Buy” call and gave the stock a target price of 55 sen from the current 35 sen apiece.
However, Public Investment Bank Bhd (PublicInvest) said on the downside, Sapura Energy is undergoing slower-than-expected recovery, despite having an improved outlook.
"The weak performance is mainly attributed to lower recognition from the engineering and construction (E&C) as well as drilling segments as a result of higher costs incurred.
"Most of the E&C projects are still in the initial procurement phase as well as low utilisation of assets,” it added.
PublicInvest made an “outperform” call with RM0.43 target price.
With that aside, Sapura Energy has leaner financials, with its operations turning for the better as its bid book has tripled to US$11 billion with greater concentration in the Middle East and African markets that accounts for 56 per cent of its bids.
AmInvestment Bank expect Sapura to continue to improve earnings due to its cleaner financial slate.
"We maintain a healthy outlook for Sapura's earnings for 2020 as it gradually recovers from a healthier balance sheet after the corporate exercises," the bank-backed research firm said, maintaining a "Buy" recommendation on the stock.
The research firm said the RM9.3 billion new jobs secured in 2019 have increased Sapura's outstanding order book by 4 percent to RM17.2 billion which will augur well for the group in the long term.
"The order book is expected to grow as the group's tenders have escalated 3.5 percent to US$11 billion driven by new markets in the Middle East and Africa," AmInvestment Bank said.
Sapura is expected to break even in 2020 and hence the focus should be on 2021 and its turnaround will be tangible starting from the third quarter of financial year in 2020.