Sapura Energy recorded a 3QFY22 core net loss of -RM298m (QoQ: -RM1.5bn, YoY: RM23.2m), bringing 9MFY22 core net loss to RM1.8bn, which was yet again below expectations based on our and consensus full-year net loss forecast of -RM2.0bn and -RM1.4bn respectively. We think that Sapura will not be able to turnaround its operations in the near-to-medium term due to: (i) heightened cost overruns in its projects; and (ii) low operating efficiency due to high fixed costs within the group. However, Sapura Energy’s share price has declined -57% since our downgrade on 1 Oct 2021. With our view of a narrowed downside, we upgrade our rating to Hold (from Sell) with a lower TP of RM0.05 (from RM0.09 previously), based on 0.15x (from 0.25x) FY22 P/B.

Below expectations, again. Sapura recorded a 3QFY22 core net loss of -RM298m (QoQ: -RM1.5bn, YoY: RM23.2m), bringing 9MFY22 core net loss to RM1.8bn, which was yet again below expectations based on our and consensus full-year net loss forecast of -RM2.0bn and -RM1.4bn respectively. 3QFY22 core net losses was adjusted for: (i) Covid-19 related expenses totalling to RM242m; and (ii) an impairment charge of RM212m. Key variance against our forecast was due to lower than expected margins throughout the quarter from the group’s E&C and Drilling segments.

QoQ. Net losses narrowed to -RM298m (from -RM1.5bn in 2QFY22) due to lower net losses from its E&C and O&M business divisions, albeit still very much in the red.

YoY. Sapura registered a core net loss of -RM298m (from a core net profit of RM23.2m) was due to significantly weaker performances from all of its core business segments, especially its E&C and O&M divisions.

YTD. Sapura flipped into the red in 9MFY22 with core net loss of -RM1.8bn (from a core net profit of RM26.5m) due to: (i) heightened cost overruns from the group’s projects in India and Taiwan in 2QFY22; and a (ii) significantly weaker showing from its E&C and O&M business divisions.

Outlook. As at end-Oct 2021, Sapura’s orderbook stood at RM7.6bn with RM9bn of bids in progress and RM13bn in bids already submitted. The group has assembled a board restructuring taskforce, along with PwC and Rothschild as advisors to review its financial position, cash flows, strategy and direction of the organisation over the next 18-24 months. We continue expect current hurdles and uncertainties to continue in 4QFY22 and also FY23. Balance sheet wise, the group’s net debt and gearing continued to deteriorate, standing at RM10.1bn and 1.48x as at Oct 2021 (from RM9.9bn and 1.06x as at end-Oct 2020).

Forecast. We now project slightly wider FY22f net loss of -RM2.1bn (from -RM2.0bn previously) to account for lower margins for its E&C business division. We leave our FY22-23 earnings estimates unchanged.

Upgrade to HOLD, TP of RM0.05. Sapura Energy’s share price has declined -57% since our downgrade on 1 Oct 2021. Taking the valuations of distressed peers in the OGSE space such as Alam Maritim and KNM Group – which are trading at about 0.15x and 0.3x P/B respectively (both have triggered the PN17 criteria) – we believe that Sapura is currently trading at floor valuations (at 0.15x P/B). With our view of a narrowed downside, we upgrade our rating to Hold but with a lower TP of RM0.05 (from RM0.09 previously), based on 0.15x (from 0.25x) FY22 P/B. We maintain our view that 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 and so, we are hesitant to recommend an entry even at this juncture.

Source: Hong Leong Investment Bank Research - 14 Dec 2021