SAPRNG has been awarded three new contracts worth ~RM611m. Collectively, they mark the third contract award announcement in FY21, bringing YTD wins to ~RM2.2b and order-book to an estimated RM13b. Despite being positive on the new contracts, we are still concerned over the group’s highly geared balance sheet, and sustainability of its earnings given the current industry climate. Maintain UP with TP of RM0.05.

Awarded three new contracts worth RM611m. SAPNRG announced that it had been awarded three new contracts with a combined value of approximately RM611m comprising two engineering and construction (E&C) jobs in Qatar, Malaysia and Thailand, and one drilling contract in Congo (refer to table below for further detailed breakdown of jobs awarded).

Positive on the contract awards. Overall, we are positive on the contract awards, especially considering the current challenging environment plaguing the oil and gas sector. These contract marks the third win the group had secured in FY21, bringing YTD wins to ~RM2.2b and estimated order-book to roughly RM13b. More specifically, its E&C contract award in Qatar marks the group’s third major contract win in the Middle East, reflecting on the group’s efforts making inroads within the region. Meanwhile, the E&C award from Carigali-PTTEPI Operating Company (CPOC) marks the group’s second contract win from the same project, as earlier in the year, SAPNRG was also awarded the subsea pipeline in the same project. This could also potentially reflect the client’s satisfaction in SAPNRG’s job delivery capabilities to be able to secure a second award from the same project. Overall, we expect these jobs to fetch operating margins within the low-teens.

Still cautious on its balance sheet and earnings visibility. Despite being positive on the contract win, we still remain cautious given: (i) the group’s balance sheet concerns (net-gearing of 1.0x), although the company is currently seeking a refinancing to lengthen its average debt maturity profile by the year end, (ii) potential risk of impairments as ROAs have yet to recover to levels of yesteryears despite massive impairment exercises over the past few years. Meanwhile, given the current industry climate, sustainability of its earnings and successful materialisation of its bid-book into order-book also remain uncertain.

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.

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 - 17 Nov 2020