SAPNRG has been awarded three new contracts worth RM840m. Together, they mark the second contract win in FY21, bringing YTD wins to ~RM1.6b and estimated order book to ~RM14b. We are positive on the new contracts, especially considering the current challenging environment in the oil and gas sector. However, we are still cautious over the group’s highly geared balance sheet and earnings delivery capabilities. Maintain UP with TP of RM0.05, expecting full-year break-even earnings to occur in FY23 or beyond.

Awarded three new contracts worth RM840m. SAPNRG announced that it had been awarded three new contracts with a combined value of approximately RM840m. These contracts include two engineering and construction (E&C) jobs in Brazil and Mexico, and one drilling contract in Ivory Coast (refer to table below for further detailed breakdown of jobs awarded).

Positive on the contract awards. Overall, we are positive on the contract awards, with the company still demonstrating some degree of resilience despite the current challenging environment plaguing the oil and gas sector. These contracts mark the second win the group had secured in FY21, bringing YTD wins to RM1.6b and estimated order book to roughly ~RM14b. We expect these jobs to fetch operating margins in the teens.

Still cautious on its balance sheet and earnings visibility. Despite being positive on the contract wins, we remain cautious towards the group’s highly geared balance sheet (net-gearing of 1.1x), as well as its ability to deliver earnings consistently. We feel that the company, being heavily exposed to the upstream value chains of oil and gas industry, stands to be hardly hit by the current oil down-cycle which may pose possible risk on further order-book replenishments. With that, we hold firm of our view that we may possibly see a full-year break-even results only beyond FY22. To address these issues, the group is currently in the midst of a cost cutting exercise, such as salary cuts, asset downsizing and procurement savings, targeting to reduce RM650m in opex for FY21. The group is also currently in negotiation for a refinancing exercise to lengthen its borrowings maturity profile (to 10 years, from average of 3 years currently), as well as injecting additional working capital of ~RM1.5b to weather through the current down-cycle.

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 fall 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 - 18 Sept 2020