1QFY21 narrowed losses came better than expectations, thanks to improved E&C margins from greater job progressions. The group is currently undergoing a cost rationalisation exercise, which will see a reduction of opex by RM650m. Addressing its borrowings risks, the group is also working on a refinancing exercise, which will lengthen its borrowings maturity profile to 10 years (from 3 years currently). Nonetheless, we maintain our UP call and TP of RM0.05, as we see possible risk in order-book replenishment amidst the current industry environment.

1QFY21 results better than expected. SAPNRG recorded 1QFY21 core net loss of RM19.7m (after stripping-off forex gains of RM33.9m), coming in above expectations against our full-year loss forecasts of RM977.m and consensus of RM567.3m. The better-than-expected results were mainly due to its huge margins recovery in its engineering and construction (E&C) segment. No dividends were announced, as expected.

Results buoyed by better E&C margins. YoY, 1QFY21 saw narrowing core losses, mainly thanks to its E&C segment seeing better margins, due to greater project progression as many of its jobs at hand moved into advanced stages of completion. Meanwhile, results were also marginally helped by better drilling rig utilisation (7 rigs utilised, versus 5 in 1QFY20), on top of higher net lifting volumes from its exploration and production (E&P) segment (2.4mmboe vs 1.1mmboe in 1QFY20). Sequentially, core losses also hugely narrowed QoQ, largely for similar reasons, as (i) E&C margins improved due to projects progression, and (ii) higher E&P net lifting volumes of 2.4mmboe vs. 1.4mmboe in 4QFY20, following higher production from SK408. Meanwhile, drilling utilisation stayed flattish QoQ at 7 rigs.

In cost rationalisation mode. The group is continuing its costs savings efforts and guiding that it is able to achieve an opex savings of RM650m in FY21, stemming from salary cuts, asset downsizing as well as procurement savings. Additionally, addressing its balance sheet stress, the group is also in the midst of a refinancing exercise, which is expected to be completed by end-FY21. This is expected to see freeing up of working capital of ~RM1.5b, as well as lengthening its borrowings maturity profile from 3 years currently to 10 years. Meanwhile, the group’s order-book of RM14b (RM800m YTD wins) and bid book of RM27b stayed relatively intact, with no significant deferments or cancellation seen to-date. Nonetheless, given the impact of the current oil down cycle and low oil prices, outlook for the short to medium-term remains uncertain, as we feel that its order-book replenishments could still be at risk.

Maintain UNDERPERFORM, with unchanged TP of RM0.05, pegged to 0.1x PBV. Post-results, our FY21/22E losses forecasts are narrowed as we increased E&C contribution assumption.

Despite the improved results, we still opt to remain cautious as SAPNRG stands to be one of the hardest hit under the current oil down- cycle, which we believe may lead to possible risks to its order-book replenishment. This is on top of its weak balance sheet, with net- gearing currently at a high of 1.1x. We hold firm our view that we may possibly see breakeven results only beyond FY22.

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

Source: Kenanga Research - 30 Jun 2020