Investment Highlights

• We maintain SELL on Sapura Energy (Sapura) with an unchanged fair value of RM0.03/share, pegged to a 50% discount to FY22F NTA of 7 sen. This valuation also incorporates a neutral ESG rating of 3 stars.

• Sapura’s prospects have weakened further with the termination of its contract to transport and install monopole substructures for the Yunlin offshore windfarm turbines operated by Yunneng Wind Power Co Ltd (Yunneng) in Taiwan.

• This contract was awarded on 15 March 2019 and subsequently announced by Sapura on 26 June 2019 together with multiple other engineering, procurement, installation and drilling jobs which reached a total value of RM1bil.

• The Yunlin project was earlier scheduled for completion over 16 months by September 2020. However, this was delayed due to technical difficulties from inaccurate subsea soil data provided by the client Yunneng, as asserted by Sapura. Hence, job execution was hampered, work safety compromised and costs rose substantially above expectations.

• Currently, the work progress work has only reached 36.9% to date. The termination stems from the breakdown of negotiations after Yunneng attempted to enforce contractual claims against Sapura despite changes in conditions.

• Sapura had made loss provisions of RM1bil in 2QFY22 and additional impairments of RM212mil in 3QFY22 for the Yunlin project together other projects impacted by Covid-19 movement restrictions.

• We understand that management was earlier attempting to claim the additional costs amounting to RM300mil arising from Covid-19 delays for the Yunlin offshore wind farm and ONGC’s KG-DWN 98/2 projects. As we had highlighted in our report on 14 December last year, there was no certainty in recovery.

• Sapura aims to legally pursue claims against Yunneng under arbitration in Bremen, Germany. While the announcement indicated that the termination will not have any FY22F earnings impact, Yunlin provisions in 9MFY22 may not be sufficient against any counter-claims by the client, if successful.

• We are also uncertain if Sapura’s negotiation with ONGC on the pandemic-delayed KG-DWN 98/2 central processing platform project could encounter the same fate. With these potentially higher provisions and liquidity issues arising from vendors’ tighter credit policies, the operational landscape for Sapura remains bleak on uncertain delivery and margin prospects over the foreseeable future.

• 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.

• 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 which are operating in different value chains of the sector.

• In the absence of substantive 3QFY22 new contract wins, the group’s remaining order book further slid by 32% QoQ to RM7.6bil. This translates to an uncomfortably low 1.5x FY22F revenue given the group’s current liquidity crisis in which 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 against the backdrop of Sapura’s bid submissions decreasing by 37% QoQ to RM22bil as management focuses 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.

• 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 - 7 Feb 2022