1HFY21 turned around to profit, boosted by its E&C segment due to recognition of variation orders of ~USD20m (or ~RM82m) as part of the group’s optimisation efforts to re-explore further commercial opportunities within existing contracts, coupled with cost-saving initiatives. Nonetheless, we still opt to remain cautious, given balance sheet concerns (net-gearing of 1.0x), impairment risks, and questionability of its earnings sustainability. Maintain UP and TP of RM0.05.

1HFY21 results above expectations. SAPNRG recorded 1HFY21 core net profit of RM3.3m (arrived after stripping off net forex gains of RM34.7m), beating expectations, against our FY21E loss forecast of RM318.3m and consensus of RM453m, as its 2QFY21 managed to turn around into core net profit of RM23m (versus core losses of RM112.6m in 2QFY20 and RM19.7m in 1QFY21). As we understand, this quarter’s results were exceptionally strong as the group had recognised an additional ~USD20m (or ~RM82m) impact to its bottom-line arising from variation orders (VOs) being performed for its engineering and construction (E&C) segment. Excluding these VOs, the quarter would have recognised a loss of RM59m. Meanwhile, no dividends were announced, as expected.

Results lifted by stronger E&C. As aforementioned, 1HFY21 turned around from deep losses, thanks to stronger E&C segment. While segmental revenue fell 30% YoY (indicating less work being performed), segmental PBT managed a significant jump, thanks to the implementation of optimisation efforts, which entails cost saving measures (e.g. group-wide salary reductions, streamlining of procurements, etc) and re-exploration of commercial activities within existing contracts (which included the aforementioned ~USD20m VOs performed during the quarter). Meanwhile, its drilling segment also saw reduced losses, despite lower rig utilisation (and revenue), thanks to lowered depreciation and finance costs. These were offset by deeper losses in its exploration and production (E&P) segment, dragged by weak oil prices, on top of recognition of deferred tax expenses.

As for the individual quarter of 2QFY21, the QoQ turnaround was similarly led by its stronger E&C, due to recognition of VOs as aforementioned, offset by wider drilling losses from poorer rig utilisations, and wider E&P losses due to weaker oil prices.

Optimisation efforts to continue. The group is looking to further expand its optimisation initiatives, guiding potentially for more VOs to be recorded in 2HFY21. The group is also reporting a 25% QoQ increase in tender-book, with ongoing bids valued at RM29b, while current order book stands at RM13b.

Nonetheless, we are still cautious given: (i) balance sheet concerns, with net-gearing of 1.0x, although the company is currently seeking a refinancing to lengthen its average debt maturity profile, (ii) potential risk of impairments, as ROAs have yet to recover to levels of yesteryear despite massive impairments over the past few years. Meanwhile, sustainability of VOs to boost profits, especially going into next year, and successful materialisation of its bid-book into order-book also remain questionable.

Maintain UNDERPERFORM, with TP of RM0.05, pegged to 0.1x PBV. Post-results, we cut our FY21E/FY22E losses by 50%/52% to account for better E&C contribution assumptions.

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 - 21 Sept 2020