On Friday, Sapura Energy announced that it has issued a termination notice to Yunneng Wind Power Co. Ltd. for the transportation and installation of monopiles at the Yunlin offshore wind farm in Taiwan. We understand that the project was initially slated for completion in Sep 2020, but completion was delayed to September 2023 following unresolved technical and operational issues that are not attributable to Sapura. Overall, we think that it is too early to form a conclusive view on this development due to the current lack of information (i.e. impact on earnings, amount claimable from Yunneng and counter-claim possibilities). We maintain our HOLD recommendation with an unchanged TP of RM0.05 based on floor valuations of 0.15x FY22 P/B.

NEWSBREAK

On Friday, Sapura Energy announced that it has issued a termination notice to Yunneng Wind Power Co. Ltd. for the transportation and installation of monopiles at the Yunlin offshore wind farm in Taiwan.

HLIB’s VIEW

Key highlights. We note a few key salient points, as below:

(1) Sapura Energy was awarded the contract back in March 2019. The project was initially slated for completion in September 2020, but completion was delayed to September 2023 following unresolved technical and operational issues that are not attributable to Sapura, according to its statement.

(2) This project is Sapura’s first venture into offshore wind. Sapura installed the first of the eighty monopiles at the 640 MW Yunlin wind farm in December 2020. We understand that works are currently at 36.85% completion as at the date of termination.

(3) From the announcements, Yunneng had provided inaccurate and misleading soil data which is a serious breach of its obligations under the contract to provide soil information that are contractually relied upon by Sapura. The inaccurate and misleading soil data has critically affected Sapura’s execution of the work and caused substantial increase in costs which Yunneng has failed to compensate.

(4) In our view, this episode could be long drawn. We think that it is too early to form a conclusive view on this development due to the current lack of information (i.e. impact on earnings, amount claimable from Yunneng and counter-claim possibilities).

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. Unchanged Pending More Information.

Maintain HOLD, TP of RM0.05. 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 maintain our HOLD rating with a TP of RM0.05 based on 0.15x 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 - 7 Feb 2022