• Reiterate SELL and MYR0.02 TP, 64% downside. Sapura Energy’s 1HFY24 (Jan) results were within expectations, with narrower losses expected in 2HFY24. Although there was a slight improvement in its orderbook, we remain cautious on its engineering & construction (E&C) segment’s profitability – despite the global oil & gas landscape turning more robust. We keep our SELL rating, as a holistic debt and equity restructuring – highly dilutive, in our view – is inevitable for SAPE to get out of the woods.

• Within expectations. SAPE’s 1HFY24 core loss of MYR163m is deemed within expectations, at 61% and 68% of our and Street’s full-year forecasted losses, as we expect narrower losses in 2HFY24. No dividend was declared, as expected.

• Results review. Core losses widened by 28% to MYR92m in 2QFY24 largely due to weaker E&C contribution (project delays and higher project costs), and higher finance costs, masking the better energy arm contribution. Cumulatively, 1H24 losses were flat at MYR163m, as the energy division’s turnaround and better drilling contribution were offset by weaker E&C contribution as well as higher tax expenses and finance costs.

• Outlook. SAPE announced MYR1.4bn (USD300m) worth of offshore transportation and installation (T&I) services contracts in Angola, from Azule Energy Angola. Works are expected to be completed by 4QFY26. As such, its orderbook rose 9% QoQ to MYR6.3bn. Orderbook replenishment remains one of its biggest challenges, with limited access to bank guarantees and working capital. SAPE is pursuing major projects in Africa, and the Mediterranean, Atlantic, and Asia Pacific regions. The drilling segment is expected to deliver a stable performance as 10 out of 11 rigs are under charter contracts. In early September, SAPE received a formal notification from the Corporate Debt Restructuring Committee (CDRC), stating that the standstill period under CDRC’s regime was extended up to 10 Mar 2024.The group is actively working towards an agreement in principle with its financiers by the end of this year. In view of its stretched cash flow, SAPE will continue its strategy of pursuing contracts with relatively lower working capital requirements, as well as asset monetisation.

• Our loss estimates are largely unchanged, as we are uncertain on the E&C division’s profitability, but expect narrower 2HFY24 losses. We keep our SOP-based TP at MYR0.02, inclusive of a 10% ESG discount. Note that we have assumed 20% of total debt was converted to equity based on a conversion price of MYR0.10/share. Our share base is enlarged by 21.4bn or 1.2x. Upside risks: Better-than-expected project execution and strongerthan-expected contract flow.

Source: RHB Securities Research - 29 Sept 2023