Sapura Energy recorded a 2QFY22 core net loss of -RM1.5bn (QoQ: -RM9.3m, YoY: RM23.0m), which was way below expectations based on our full-year net profit forecast of RM97.6m and the full-year consensus net loss of -RM66.6m respectively. We believe that Sapura will not be able to turn into the black in the near-to-medium term due to: (i) heightened cost overruns in its business projects in India and Taiwan and (ii) low operating efficiency due to high fixed costs within the group. With that, we downgrade Sapura Energy to SELL (from BUY) with a lower TP of RM0.09 (from RM0.15 previously), based on 0.25x (from 0.3x) FY22 P/B which is in line with its 3-year historical mean P/B.

Way below. Sapura recorded a 2QFY22 core net loss of -RM1.5bn (QoQ: -RM9.3m, YoY: -RM11.5m), which we deem to be way below expectations based on our full-year net profit forecast of RM97.6m and the full-year consensus net loss of -RM66.6m respectively. We arrive at 2QFY22 core net losses after adjusting for a one-off Covid- 19 related expense of RM111m. Key variance against our forecast was due to: (i) lower revenue recognition due to lesser jobs completed throughout the quarter and (ii) heightened cost overruns from the group’s projects in India and Taiwan.

QoQ. Sapura widened its losses to -RM1.5bn (from -RM9.3m) due to: (i) poorer performances across all of its business divisions and (ii) heightened cost overruns from the group’s projects in India and Taiwan.

YoY. Sapura’s expanded core net loss of -RM1.5b (from a core net profit of RM23.0m) was due to: (i) weaker showing from 3 out of 4 of its core business segments, particularly its E&C and O&M divisions and (ii) heightened cost overruns from the group’s projects in India and Taiwan.

YTD. Sapura turned into the red in 1HFY22 with core net loss of -RM1.5bn (from a core net profit of RM3.3m) due to the same reasons mentioned above.

Job wins secured. Sapura has secured two job wins with a combined value of RM2.6bn, as follows:

1) RM942m for E&C works – expected completion by 4QCY2022.

2) RM1.7bn for the services and chartering of Sapura Diamante and Topazio pipe laying support vessels to Petrobras under its JV in Brazil – expected completion by 1QCY2024.

Outlook. As at end-July 2021, Sapura’s orderbook stood at RM7.5bn with RM18bn of bids in progress and RM17bn in bids already submitted. Sapura has guided that it is assembling a board restructuring taskforce to review its financial position, cash flows, strategy and direction of the organisation over the next 18-24 months. Sapura also expects current hurdles and uncertainties to continue in 2HFY22. Balance sheet wise, the group’s net debt and gearing deteriorated significantly, standing at RM10.2bn and 1.33x as at July 2021 (from RM9.8bn and 1.04x as at July 2020).

Forecast. We now project wider net losses of -RM2.0bn, -RM621m and RM580m for FY22-24F respectively (from net profits of RM98m, RM200m and RM221m previously) to account for: (i) higher fixed costs; and (ii) lower job completion assumptions.

Downgrade to SELL with a TP of RM0.09. We downgrade Sapura Energy to SELL (from BUY) with a TP of RM0.09 (from RM0.15 previously) based on 0.25x (from 0.3x) FY22F BVPS, which is in line with its 3-year historical mean. Sapura will need a lot more time and effort to turnaround its operations into profitability which we do not foresee happening within the next 12 months

Source: Hong Leong Investment Bank Research - 1 Oct 2021