Sapura Energy (SapE) reported headline loss of RM6.6bn in 4QFY22 mainly due to impairments amounting to RM5.4bn. Excluding this, the Group reported core loss of RM1.2bn for the quarter, widening its core loss for the full year FY22 to RM2.2bn. EBITDA for the year slipped into the red, at RM2.2bn against RM809.3m in FY21. The results are below our and consensus full year loss expectations of RM1.6bn and RM1.4bn respectively. The main cause of the disappointing performance is its legacy contracts, resulting in liquidation damages, cost overruns, unapproved claims, contract de-scoping and COVID-19 additional costs. Moving forward, we view the Group will still be in the red as profit margins will remain volatile given the difficulties in managing costs arising particularly from its legacy projects. Liquidity concerns remain, further hampering the turnaround efforts while limiting its growth prospect. We widen our FY23-24 forecasts to larger net losses of RM717.4m and RM561.2m (from a loss of RM602.8m and RM444.5m), considering lower job replenishments and weaker operating margins. We cut our call to Trading Sell with a revised sum-of-parts TP of RM0.03 (from RM0.05) given heightened uncertainties on its financial standing.

• 4QFY22 headlines loss dragged by impairments. The Group reported headline net loss of RM6.6bn in 4QFY22, widening its 3QFY22 loss of RM669.3m. This is mainly attributed to impairments of RM5.4bn, comprising i) RM3.3bn on goodwill (E&C and O&M: RM1.6bn, drilling: RM1.7bn) and ii) RM2.1bn on fixed assets mainly for drilling RM2bn.

• Overall performance affected by legacy contracts. The Group reported core net loss of RM1.2bn for the quarter against RM428.9m in 3QFY22, widening its core loss to RM2.2bn for FY22. EBITDA for the year slipped into the red, at RM2.2bn against RM809.3m in FY21. Almost all the project losses are derived from legacy contracts i.e., liquidation damage (RM560m), cost overruns (RM560m), unapproved claims (RM430m), contract de-scoping (RM410m) and costs arising from COVID-19 (RM280m).
  E&C (engineering) and O&M (maintenance) segment reported lower revenue of RM240.6m (-68.9% QoQ) and core loss before tax of RM1bn. Revenue for drilling segment was lower 10.4% QoQ while core loss before tax widened to RM88.9m against RM18.9m in the previous quarter. For E&P (production) segment, it reported pre-tax loss of RM19.9m from a pre-tax profit RM14.8m mainly due to the provision of unsuccessful drilling in Mexico.

• Earnings forecast. The Group will still be in the red in the coming year(s), attributable to legacy project recognition. The legacy projects are expected to contribute to revenue at proportions of 54% in 1QFY23, 36% in 2QFY23, 26% and 27% in 3QFY23 and 4QFY23 respectively. Profit margins will remain volatile given the difficulties in managing execution cost arising from these projects. Moreover, we also view that operating conditions remain challenging due to uncertainties caused by the COVID-19 pandemic.

• Outlook. Liquidity concerns remain, further hampering the turnaround efforts while limiting its growth prospect. This also has affected certain project execution due to the lack of support from suppliers given the amount still owed. The Group is in the midst of negotiating with its vendors on outstanding payments and lenders through existing or new facilities and under the Scheme of Arrangement (SOA). Meanwhile, renegotiation of legacy contracts, asset monetisation discussion is also on-going. Additionally, we are troubled at the deficiency in its share capital and its viability as a going concern, which could see it classified as an affected issuer in due course.

Source: PublicInvest Research - 21 Mar 2022