Results

• Continuous losses – Sapura Energy posted a net loss of RM669m in 3QFY22 compared to a net profit of RM17m in 3QFY21 mainly due to Covid-19-related costs of RM131m, higher project costs, impairment of RM212m and forex loss of RM29m.

• Higher revenue - Quarterly revenue rose 10% YoY to RM1.46b due to higher contribution from Engineering and Construction (E&C) and Drilling, offset by lower revenue in Operations & Maintenance (O&M).

• Narrowed loss QoQ – Sapura’s net loss narrowed to RM669m from RM1.5b in the previous quarter while revenue almost doubled QoQ. To recap, in 2QFY22 Sapura booked the full amount of foreseeable losses for contracts related to Yunlin (Taiwan) and 98/2 ONGC (India) due to delays related to Covid-19 and changes in local site condition. This resulted in a double whammy of lower revenue recognition and spike in operating costs as Sapura needed to rebase the projects’ timelines, costs and % of completion.

• E&C still in the red – Quarterly revenue from the E&C segment rose 14% YoY and 105% QoQ to RM1.05b. The division posted loss before tax of RM527m (-53% QoQ). Yard utilisation stands increased to 36% from 25% in 2QFY22 while key vessel utilisation declined to 77% from 85% in 2QFY22.

• Improved Drilling performance – Quarterly revenue from Drilling rose 121% YoY and 32% QoQ to RM294m with 7 rigs operating and 7 rigs being stacked. The division posted LBT of RM19m (-74% YoY and 111% QoQ).

• E&P returned to the black - Sapura’s E&P JV, Sapura OMV posted PBT of RM15mm (vs LBT of RM86m in 2QFY22 and PBT of RM33m in 3QFY21). Number of barrels lifted declined to 32,6m barrels from 3.4m in 2QFY22. Average price increased to US$80/barrel from US$73/barrel in 2QFY22.

• Steady orderbook – Sapura’s orderbook stands at RM7.6b while its jointly-controlled entities’ orderbook stands at RM6.8b). Going forward, RM2b of the orderbook will be booked in the remainder of FY22 and another RM3.8b in FY23 and RM1.8b in FY24. Going forward, Sapura has submitted 13 bids globally with a combined value of RM22b.

• Higher gearing – Net debt to equity climbed to 1.48x from 1.33x in the previous quarter due to higher accumulated loss. In 3QFY22, Sapura generated RM168m of operating cashflow to lift its cash reserves to RM590m.

Earnings Outlook

• Earnings below expectation – 9MFY22 net loss of RM2.28b was worse than our FY22 estimate of RM1.23b while nine months’ revenue of RM3.67b was within expectation after achieving 70% of our full year.

• Forecasts reduced - We are projecting a wider loss of RM2.5b for FY22 (previously RM1.23b) and keeping our revenue estimates. For FY23, we are slashing our EPS and revenue forecasts by 92% and 32% respectively given the operational (execution) and cashflow (liquidity) challenges.

• Sapura is in negotiations with clients to resolve Covid-19 related disruption costs through commercial settlement 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. The management is also focusing on asset divestment and executing projects in hand to improve cashflow.

Valuation & Recommendation

• We are maintaining our recommendation at SELL with a lower target price of 4.5 sen (previously 9.5 sen) based on -2 std deviation on its 3-year mean P/B with a NTA of RM0.40 per share.

Source: JF Apex Securities Research - 14 Dec 2021