Sapura recorded 2QFY23 core net loss of -RM77m (QoQ: -RM203m, YoY: -RM1,462m) which was within expectations based on our/consensus full year net loss forecast of -RM758m/-RM571m respectively. We think that it will be an uphill task for Sapura 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 due to its stretched balance sheet as it is now officially a PN17 company; (iii) job delivery and execution risks as Sapura has yet to display a satisfactory track record in recent years; and (iv) inability to win jobs due to its challenged balance sheet. We cease coverage on Sapura Energy for the following reasons: (i) reallocation of internal resources; (ii) stretched and deteriorating balance sheet; and iii) lack of investor interest. Our previous SELL recommendation and TP of RM0.01 (based on 0.5x FY22 P/B) on Sapura should no longer be used as a reference going forward.

Still in the red – within expectations. Sapura recorded 2QFY23 core net loss of -RM77m (QoQ: -RM203m, YoY: -RM1,462m) which brought 1HFY23’s sum to -RM280m (SPLY: -RM1,471m). This is within expectations based on our/consensus full-year net loss forecast of -RM758m/-RM571m respectively. 1HFY23 core net losses was mainly adjusted for: (i) net forex gains of RM250m; (ii) RM93m of Covid-19 additional claims; and (iii) liquidated damages reversal worth RM26m.

QoQ. Net losses shrunk to -RM77m in 2QFY23 (from -RM203m in 1QFY23) due to: (i) higher utilisation days from the group’s Drilling segment; and (ii) increased percentage of completion from its Engineering and Construction (E&C) segment.

YoY. Sapura registered a lower core net loss of -RM77m in 2QFY23 (from a core net loss of -RM1,462m in 2QFY22) which was due to multiple factors: (i) higher revenue recognised from all of its business segments; (ii) lower provision for foreseeable losses, and (iii) lower project costs incurred.

YTD. Sapura registered a lower core net loss of -RM280m in 1HFY23 (from a core net loss of -RM1,471m in 1HFY22) which was due to multiple factors: (i) lower share of losses from its JV and associates by; (ii) lower provision for foreseeable losses, and (iii) lower project costs incurred.

Outlook. As at end-July 2022, Sapura’s orderbook stood at RM7.7bn. We continue expect current hurdles and uncertainties to continue in FY23. The group’s net debt level continued to deteriorate, to RM10.3bn as at end-2QFY23 from RM9.9bn as at end-FY22. Sapura’s net gearing stood at 54.3x as at end-2QFY23. We think that it will be an uphill task for Sapura 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 due to its balance sheet distress as it is now officially a PN17 company; (iii) job delivery and execution risks as Sapura has yet to display a satisfactory track record in recent years; and (iv) challenges in winning jobs due to its stretched balance sheet.

Forecast. Unchanged.

Cease coverage. We cease coverage on Sapura Energy for the following reasons: (i) reallocation of internal resources; (ii) the group’s stretched and deteriorating balance sheet; and (iii) lack of investor interest on the company. Our previous SELL recommendation and TP of RM0.01 (based on 0.5x FY22 P/B) on Sapura should no longer be used as a reference going forward.

Source: Hong Leong Investment Bank Research - 27 Sept 2022