FY21 narrowed loss came in below expectations amidst project disruptions, Covid-19 related additional costs and monsoon season impact. Nonetheless, despite lower revenue due to the pandemic, the group still managed to reduce core net loss on cost optimisation efforts. The group also announced new contract wins of RM1b, bringing order- book to RM13.7b. Maintain OP and TP of RM0.21, premised on the long-term fruition of the group’s corporate and financial restructuring efforts.

FY21 core net loss wider than expected. SAPNRG reported FY21 core net loss of RM303m (arrived after adjusting for non-core items such as forex, one-off additional income from disposals, and one-off JV technical fees received) came in wider than our full-year loss forecast of RM161m and consensus of RM113m. This was mainly due to weaker- than-expected engineering and construction (E&C) contributions, arising from project schedule disruptions, additional costs arising from Covid-19, and poorer project margins working throughout the monsoon season. No dividends were announced, as expected.

Improved FY21 despite weaker 4QFY21. YoY, FY21 core net loss narrowed 77%. Despite the lower revenue amidst slower project progression due to the pandemic, the year saw bottom-line improvements as a result of increased efforts in operational efficiencies and cost optimisation. For the quarter of 4QFY21, core losses widened 40% QoQ from 3QFY21, dragged by weaker E&C due to the aforementioned Covid-19 related costs and weaker margins amid the monsoon season.

Secured RM1b worth of new contracts. Additionally, SAPNRG also announced securing six new contracts worth RM1b in total, across Malaysia and Brunei. This marks the second contract announced FYTD, bringing FYTD total new wins to RM2.85b. We are positive on the new wins, boosting its current order-book to RM13.7b, providing increased revenue visibility moving forward. We expect these contracts to fetch low-teens operating margins.

In the midst of a recovery. Going forward, the group guides that it remains focused in its acceleration programme, seeking further improvements in commercial and operational activities. Additionally, the recently completed refinancing exercise sees an extension of borrowings to seven years, from an average of ~3 years previously. This effectively alleviates any immediate borrowings repayment risks, while maintaining finance costs level as rates are similar as before. Furthermore, global prospective bids now stand at RM123b – representing an 80% growth YoY, signalling an overall recovery industry-wide of which, the group has successfully submitted RM31.5b worth of bids.

Maintain OUTPERFORM, with unchanged TP of RM0.21, pegged to 0.4x PBV – close to mean valuations. Post-results, we widened our FY22E losses by 9% as we lowered our E&C contributions assumptions, based on an order book replenishment assumption of RM5b, while simultaneously introducing new FY23E figures.

While near-term earnings turnaround still remains uncertain, our OUTPERFORM call is premised on the group’s long-term fruition of its ongoing corporate and financial restructuring, and steeply discounted valuations trading at 0.2x PBV.

Risks to our call include: (i) deterioration in corporate governance, (ii) cost escalation, and (iii) failure to secure adequate order-book replenishment.

Source: Kenanga Research - 28 Apr 2021