Sapura recorded 4QFY22 core net loss of -RM1,194m (QoQ: -RM298m, YoY: - RM178m), bringing FY22 core net loss to -RM3.0bn (FY21: -RM80.3m), which was yet again below expectations based on our and consensus full-year net loss forecast of -RM2.1bn and -RM1.9bn 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; (ii) liquidity issues from difficulties to obtain funding; and (iii) inability to win jobs due to its balance sheet distress. We downgrade Sapura Energy to SELL (from HOLD previously) with a lower TP of RM0.01 (from RM0.05 previously), based on 0.5x FY22 P/B.

Missed expectations, again. Sapura recorded 4QFY22 core net loss of -RM1,194m (QoQ: -RM298m, YoY: -RM178m), bringing FY22 core net loss to -RM3.0bn (FY21: -RM80.3m), which was yet again below expectations based on our and consensus full-year net loss forecast of -RM2.1bn and -RM1.9bn respectively. FY22 core net losses was mainly adjusted for: (i) Covid-19 related expenses totalling to approximately RM242m; and (ii) provision for impairment of goodwill and PPE amounting to RM5.4bn. Key variance against our forecast was due to lower than expected revenue and margins throughout the quarter from the group’s E&C and Drilling segments.

QoQ. Net losses expanded to -RM1,194m (from -RM298m in 3QFY22) due to lower revenue and wider net losses from its E&C and O&M business divisions, which we believe was due to cost overruns and weaker project execution.

YoY. Sapura registered a core net loss of -RM1,194m (from a core net loss of -RM178m) was due to significantly weaker performances from all of its core business segments, especially its E&C, O&M and Drilling divisions.

YTD. FY22 core net loss of -RM3.0bn widened more than 35-folds from due to: (i) heightened cost overruns from the group’s projects in India and Taiwan in 2QFY22; and (ii) significantly weaker showing from its E&C and O&M business divisions.

Outlook. As at end-Jan 2022, Sapura’s orderbook stood at RM6.6bn with RM28bn of bids in progress. We continue expect current hurdles and uncertainties to continue in FY23. The group’s net gearing level continued to deteriorate, which ballooned to 39.0x as at end-Jan 2022 (from 1.1x as at end-Jan 2021) due to lumpy impairments in its intangible assets (which we believe was mainly goodwill and PPE written-down) in 4QFY22 – this significantly reduced its book value. 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; (ii) liquidity issues from difficulties to obtain funding; and (iii) inability to win jobs due to its balance sheet distress.

Forecast. We now project a wider FY23-24f net loss of -RM717m and -RM706m respectively (from -RM621m and -RM580m in FY23-24f previously) to account for lower margins for its E&C business division. We also forecast Sapura to eventually dip into negative book value due to the continuity of expected losses in FY23-24f.

Downgrade to SELL, TP of RM0.01. As we think that the worst is not over for the group, we downgrade Sapura to SELL with a lower TP of RM0.01 (from RM0.05 previously), based on 0.5x FY22 P/B. We think that Sapura will need more time and effort to turnaround its operations into profitability, which we do not foresee happening anytime soon. We are concerned over its operational liquidity from difficulties to obtain funding and its ability to win future jobs due to its balance sheet distress.

Source: Hong Leong Investment Bank Research - 21 Mar 2022