SAPNRG was awarded five new E&C contracts worth RM766m from Southeast Asia region. We are positive on the contracts, being the group’s first win for FY21, lifting order book to ~RM14b. Expect these jobs to fetch roughly low teens operating margins. Nonetheless, given the overall lack of earnings visibility for the group, we maintain our UP call and TP of RM0.05.

Awarded five new contracts worth RM766m. SAPNRG announced that it had been awarded five new engineering and construction (E&C) contracts, with a combined value of approximately RM766m. The jobs awarded are all in Southeast Asia, namely Brunei, Singapore, Thailand and Malaysia (refer to table below for further detailed breakdown of jobs awarded).

Positive on the job wins. Overall, we are positive that the company is still able to secure new job awards despite the current market conditions in the oil and gas industry. These jobs represent the first contract announcement for SAPNRG for FY21, and should help lift its order-book to ~RM14b. Looking at the job scopes, awarded contracts are well within SAPNRG’s expertise and service offerings while the Work locations are also within SAPNRG’ well-established geographical presence. We expect these jobs to fetch approximately low-teens operating margins, although earnings recognition would most likely be back loaded to later stages of job progression.

Still lacking earnings visibility. Despite being positive on the job wins, we deem it insufficient to restore any resemblance of earnings visibility for the company. We hold firm our view that the company would only possibly stage an earnings turnaround beyond FY22. The group have been severely hit by the current oil down-cycle as well as the Covid-19 pandemic disrupting operations, and is currently in an opex and capex reduction mode. The group is also current working on its refinancing exercise, which will see the extension of maturity for existing debts, as well as a request for additional working capital of RM2b, to help alleviate its tight finances, with net-gearing currently at a high of 1.0x, despite already completing its huge RM4b rights issue in January 2019.

Maintain UNDERPERFORM, with TP of RM0.05 pegged to “floor” valuations of 0.1x PBV. No changes to our FY21-22E numbers, as the new wins are deemed to be still within our contract replenishment assumption of RM5b. Overall, given the lack of earnings visibility, combined with its ever increasing borrowings and high net-gearing levels, on top of order-book and tender-book materialisation risks, we feel our “floor” valuations ascribed are well justified.

Risks to our call include: (i) better-than-expected recognition of order book and project execution margins, (ii) huge replenishment of order book, and (iii) significant improvements in cash flow and balance sheet.

Source: Kenanga Research - 4 Jun 2020