Investment Highlights

• We downgrade Sapura Energy (Sapura) to SELL from HOLD with a lower fair value of RM0.03/share (from an earlier RM0.11/share), pegged to a 50% discount to our revised FY22F NTA of 7 sen. This valuation also incorporates a neutral ESG rating of 3 stars.

• The FY22F NTA discount reflects our sharply deteriorated loss forecasts, up by 79% to RM3.1bil for FY22F and 22x to RM1.6bil for FY23F due to lower engineering & construction (E&C) progress and cost provisions for E&C and drilling divisions. These lower revenue and margin assumptions also reversed FY24F earnings of RM71mil to a loss of RM621mil.

• Sapura’s 9MFY22 loss of RM2,283mil was significantly below expectations vs. our earlier FY22F loss of RM1.7bil and street’s RM1.4bil. This largely stemmed from slower E&C construction progress, RM212mil asset impairments and RM242mil provisions for foreseeable losses from Covid-19 delays and site variations.

• While management is attempting to claim the additional costs of RM300mil arising from Covid-19 delays for the Yunlin offshore wind farm and ONGC’s KG-DWN 98/2 projects, there is no certainty in recovery as we understand that Sapura’s clients are also 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 remains bleak on uncertain delivery and margin prospects over the next 2 quarters.

• While the group’s 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 persist over the next few quarters as Sapura is expected to register negative EBITDA for the next 2 years.

• The group’s 3QFY22 losses halved QoQ to RM669mil from a doubling in revenues from the E&C division, 4x surge in operation and maintenance and 32% increase in drilling from higher rig utilization.

• This was partly offset by asset impairments of RM212mil and Covid-19 costs of RM131mil in 3QFY22. Additionally, the exploration and production segment turned around from a 2QFY22 loss of RM86mil to a 3QFY22 pretax profit of RM15mil despite average crude lifting price rising 10% QoQ to US$80/barrel as production slid slightly by 3% to 3.5mil barrels of oil equivalent.

• 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 appears to be substantively worse than other service providers such as Dialog Group and Yinson operating in different value chain of the sector.

• In the absence of substantive 3QFY22 new contract wins, the group’s remaining order book has shrunk by 32% QoQ to RM7.6bil. This translates to an uncomfortably low 1.5x FY22F revenue given the group’s current liquidity crisis. Thus suppliers are wary of extending further credit with Sapura’s trade payables rising by 24% to RM3.3bil from 4QFY21. Furthermore, the group may not have the financial capacity to undertake new jobs notwithstanding Sapura’s bid submissions decreasing by 37% QoQ to RM22bil with management focusing on key geographical areas and market segments.

• While the group has drawn up a restructuring task force to explore asset divestments to improve liquidity, this may imply further impairments to RM8.9bil fixed assets as well as RM5bil goodwill on past acquisitions over the coming quarters. Even without incorporating any further asset impairments, our substantively higher FY22F–FY24F losses have already reversed NTA to a negative 3.7 sen by FY24F.

• The stock currently trades at a justified discount of 30% to FY22F net tangible assets given the prospects of further losses. Any equity-raising exercise would be highly dilutive to existing shareholders at the current battered share price.

Source: AmInvest Research - 14 Dec 2021