Sapura Energy (SapE) reported headline earnings of RM10.2m, attributed mainly to foreign exchange (FX) gains of RM151.3m and other exceptional items amounting to RM12.4m. Excluding these, the Group reported a core net loss of RM128.7m in its 3QFY23 results, widening its core net loss for 9MFY23 to RM289.7m (9MFY22: RM966.8m core net loss). While revenue declined slightly by 9.2% YoY, we expect to see overall performance helped by reversal on claims and liquidated damages. Operations are still uncertain, particularly in the Engineering and Construction (E&C) segment due to underperforming legacy contracts. The results are deemed in line with our expectations with our FY23 forecasted net loss of RM717.4m and RM500m for consensus. Project executions are expected to remain challenging given the tough operating environment. We maintain our FY23-25 earnings forecast as profit margins are expected to remain volatile. Our Neutral call and the SOTP derived TP of RM0.05 is retained.

• E&C segment turned red, challenges remain. E&C segment registered a pre-tax loss of RM27.1m as compared to RM58.5m pre-tax profit in the previous quarter. While revenue improved 17% QoQ, we expect to see profitability affected by lower recognition from commercial settlements from underperforming contracts in its E&C segment and materialisation of additional claims in O&M (maintenance) segment. Outstanding orderbook for E&C and O&M stands at ~RM4bn, though profitability remains a concern given the execution of legacy contracts amid the current operating climate. We gather that the exposure of legacy contracts will reduce to 25% in 4QFY23.

• Higher rig utilisation. We expect performance of its Drilling segment will remain stable in 4Q given higher rig utilisation. At the end of 3QFY23, 10 out of the 11 rigs were fully operational. The same number of rigs will be in operation in 4QFY23. Outstanding orderbook for drilling segment stands at RM2.3bn. Drilling segment EBITDA margin is currently at 42%.

• Uncertainties remain. Given the prevailing high cost of material prices, some projects in the E&C have been reviewed or deferred to next year. Liquidity concerns are also hampering SapE’s turnaround efforts while affecting certain project execution and ability to replenish its orderbook due to limited access to bank guarantees and working capital facilities during the restructuring phase. To keep its ecosystem running, management is looking to expedite commercial settlement of contract claims with clients, and review underperforming contracts. Asset monetisation is on-going with the recently completed disposal of 3 drilling rigs to NKD Maritime Limited being the latest.

Source: PublicInvest Research - 9 Dec 2022