Investment Highlights

• We downgrade Sapura Energy (Sapura) to HOLD from BUY with a lower fair value of RM0.11/share (from an earlier RM0.29/share), pegged to a 30% discount to its FY22F NTA. This valuation reflects a neutral ESG rating of 3 stars.

• We have reversed our earlier FY22F and FY23F earnings to losses of RM1.7bil and RM73mil due to loss provisions of RM1bil in 2QFY22, lower engineering & construction (E&C) progress and halving of FY22F–FY23F margins for E&C and drilling divisions. These lower revenue and margin assumptions also reduced FY24F earnings by 65%.

• Sapura’s 1HFY22 normalised loss of RM1,620mil (excluding gains on disposal of RM1mil) was significantly below expectations vs. our earlier FY22F net profit of RM46mil and street’s loss of RM66mil. This largely stemmed from slower E&C construction progress, higher quarantine costs and provisions for foreseeable losses from Covid-19 delays and site variations.

• While management is attempting to claim the additional costs arising from Covid-19 delays, there is no certainty in recovery as we understand that the group’s clients are likewise currently struggling under unprecedented scenarios amid ongoing movement restrictions and volatile commodity prices.

• Together with liquidity issues arising from vendors’ tighter credit policies, the operational landscape for Sapura has substantively deteriorated on uncertain delivery and margin prospects over the next 2 quarters.

• While the group’s RM7bil short-term debt of RM7bil will be reclassified back to long-term debt after receiving the banks’ waiver from a breach of covenant terms for RM10bil debt, this issue could re-emerge by 4QFY22 as Sapura could register negative EBITDA for the full year.

• The group’s 2QFY22 losses surged to RM1,517mil from just RM49mil in 1QFY22 from a severe reversal in operational performance in all 4 major divisions as follows:

• E&C registered the group’s worst loss of RM1.1bil (vs a 1QFY22 pretax profit of RM51mil) largely from RM1bil loss provision as revenue halved QoQ from slower progress arising from Covid- 19 movement restrictions and site problems at the Yunlin windfarm project’s monopole installation off Taiwan.

• Operation & maintenance loss of RM187mil from a 1QFY22 pretax profit of RM3mil largely from a 67% QoQ drop in revenue from movement restrictions and higher costs.

• Drilling loss of RM9mil from a 1QFY22 pretax profit of RM22mil due to higher quarantine expenses and a revenue decline of 11% QoQ as the semi-submersible tender rig Sapura Berani was transferred from Congo to Ivory Coast, led to a 20-% point decline in the unit’s utilisation to 80%.

• The exploration and production segment surprisingly registered a 2QFY22 loss of RM86mil (vs 1QFY22 pretax profit of RM52mil) despite average crude lifting price rising 14% QoQ to US$73/barrel as production slid slightly by 3% to 3.4m barrels of oil equivalent. This stemmed mainly from the reversal of earnings recognised earlier from the sale of upstream assets in Peninsular Malaysia (comprising 70% interest in PM329, 60% in PM323 and 50% in PM319, Abu, Abu Kecil, Bubu, North Lukut and Penara production sharing contracts) to Jadestone Energy on 1 August 2021.

• Sapura has just announced the securing of RM942mil new contracts from Santos for the Spartan & Spar transport & installation umbilical replacement and design, construction and installation of the Dorado wellhead platform in the Bedout sub-basin, off Western Australia, and Petrobras’ RM1.7bil charters over 3.5 years for Sapura Diamante and Sapura Topazio. Including an effective interest in RM7.2bil JV orders, the group’s remaining order book has slid by 6% QoQ to RM11.1bil. Meanwhile, Sapura’s bid submissions have decreased by 35% QoQ to RM35bil as the group focuses on key geographical areas and market segments.

• Even though job prospects are improving across the globe on a higher crude oil price environment, the pandemic’s adverse impact on Sapura’s earnings delivery was substantively worse than other service providers such as Dialog Group and Yinson. While the group still has unutilised working capital facilities of RM612mil, Sapura’s cash flows could be constrained should vendors impose tight credit terms against its trade payables of RM3.3bil (+55% YoY). Hence, the group is exploring asset divestments to improve liquidity that may imply further impairments in the coming quarters.

• The stock currently trades at a justified discount of 30% to FY22F net tangible assets given the possibility of further losses.

Source: AmInvest Research - 1 Oct 2021