Results

Into the red – Sapura Energy posted a net loss of RM1.5b in 2QFY22 compared to a net profit of RM21m in 2QFY21 mainly due to Covid-19-related costs incurred by Engineering and Construction (E&C) projects in Taiwan and India.

Full accounting of foreseeable losses - The huge loss and spike in operating cost was due to delays related to Covid-19 and changes in local site condition, causing Sapura to rebase the projects’ timelines, costs and percentage of completion. This resulted in a double whammy of lower revenue recognition and the company immediately book in the full amount of foreseeable losses for the whole contract.

The management will negotiate with clients to claim the costs but we are cautious as the Taiwan and Indian contracts were won in 2019-2020 and are without clauses to cover the Covid-19 costs.

Sapura has estimated RM400m of Covid-19 related cost for the year with RM69m incurred in 2QFY22 and RM111m in 1HFY22.

Dip in revenue - Quarterly revenue plunged 39% YoY to RM747m due to lower contribution from Engineering and Construction (E&C) and Operations & Maintenance (O&M) divisions.

Widened loss QoQ – Sapura’s net loss widened to RM1.52b from RM97m in the previous quarter while revenue dropped 49% QoQ.

E&C dragged earnings lower – Quarterly revenue from the E&C segment dropped 42% YoY but declined 55% QoQ to RM515m. The division posted loss before tax of RM1.12b. Yard utilisation stands at 25% while key vessel utilisation is at 85%.

Stable Drilling performance – Quarterly revenue from Drilling rose 19% YoY but declined 11% QoQ to RM223.6m with 7 rigs operating and 7 rigs being stacked. The division posted LBT of RM9m vs LBT of RM32m in 1QFY21 and PBT of RM22m in 2QFY22 respectively.

E&P losses due to disposal - Sapura’s E&P JV, Sapura OMV posted loss of RM86m (vs profit of RM52m in 1QFY22 and loss of RM54m in 2QFY21) following the disposal of its Peninsular Malaysian assets. Number of barrels lifted rose to 3.4m barrels from 3.5m in 1QFY22. Average price increased to US$73/barrel from US$64/barrel in 1QFY22.

New contracts secured – In a separate announcement, Sapura Energy has won contracts totalling RM2.64b as follows:

- Spartan & SHUR Transportation and Installation Works by Santos WA Northwest (Australia) to be completed by 4Q2022

- Design, Construction and Installation of the Wellhead Platform for the Dorado project by Santos WA Northwest (Australia) to be completed by 1Q2024

- Pipe laying support vessels Sapura Diamante and Sapura Topazio were chartered by Petrobras (Brazil) for 3.5 years

Clear visibility – After the latest contract wins, Sapura’s orderbook stands at RM14.7b (RM7.5b from subsidiaries and RM7.2b from jointly-controlled entities) from RM11.8b in the previous quarter. Going forward, RM4b of the orderbook will be booked in the remainder of FY22 and another RM2.6b in FY23. Going forward, Sapura has submitted bids for RM35b worth of jobs worldwide including renewable energy projects.

Higher gearing – Net debt to equity climbed to 1.3x from 1.1x in the previous quarter as a debt facility was reclassified as current debt but will be reclassified as non-current in the next quarter after the company secured a waiver from lenders. Cashflow remains a concern as the company continues to seek financing to pay its vendors.

Earnings Outlook

Earnings below expectation – 1HFY22 net loss and revenue was below full year expectation of net profit of RM99m and revenue forecast RM7.2b.

Forecasts reduced - In view of the latest development, we are projecting a loss of RM1.23b for FY22 and lowering revenue estimates by 28% to RM5.2b. We maintain our FY23 forecasts in expectation of improved earnings amid better Covid-19 situation.

Valuation & Recommendation

Due to the challenges and concerns over earnings and financing, we are reducing our recommendation to SELL from BUY with a lower target price of 9.5 sen (previously 17 sen) based on -1 std deviation on its 3-year mean P/B and a NTA of RM0.50 per share.

Source: JF Apex Securities Research - 1 Oct 2021