Its 3QFY22 results continue to be loss-making, missing expectations, as the group continues to face higher project costs and slower activities. Overall, we are feeling increasingly uncomfortable with the group’s liquidity issues and short-term balance sheet uncertainty for the time being. Hence, we maintain UP with a lower TP of RM0.04.

9MFY22 miss expectations. SAPNRG’s 9MFY22 results recorded a core net loss of RM2.1b (arrived after stripping out an impairment charge of RM212m, as disclosed during an analysts’ briefing, coupled with net forex sum, among other non-core items) – missing expectations against our full-year loss forecast of RM2.4b and consensus of RM1.4b, severely dragged by the poorer engineering and construction (E&C) and operations and maintenance (O&M) segments amidst higher project costs coupled with lower activities. No dividends were announced, as expected.

Another quarter in the red. For the 3QFY22 quarter, SAPNRG recorded core net loss of RM486m – widening nearly 4x YoY, dragged by higher project costs for its E&C, slower O&M activities, and poorer exploration and production (E&P) contributions due to a reduction of deferred tax liabilities for certain oil fields in the previous quarter. These were marginally offset by higher drilling utilisation. In a sequential comparison, 3QFY22 contrastingly managed to narrow its losses by 69% QoQ, mainly thanks to hugely narrowed losses for its E&C and O&M segments as last quarter saw the recognition of foreseeable losses and higher project costs. Additionally, E&P also managed a turnaround into profit as last quarter recognised disposal losses of its Peninsular Malaysia blocks. However, these were marginally offset by its poorer drilling segment, dragged by lower rig days. Cumulatively, 9MFY22 saw losses widened by >17x, mainly dragged by the higher project costs and slower activity levels for its E&C and O&M segments.

Immediate future remains uncertain. The group continues to face short-term liquidity challenges amidst the project delays and difficulties to execute jobs. Since last quarter, all of the company’s debts (amounting to RM10.7b) have been reclassified into short-term, after the breach of loan covenant while the group has yet to fulfil the conditional requirements. Amidst the ongoing losses, its net-gearing has also ballooned further to 1.5x, from 1.1x since the start of the year.

Maintain UNDERPERFORM, with a lowered TP of RM0.04 (from RM0.07 previously). We are feeling increasingly uncomfortable with its short-term balance sheet uncertainty and liquidity challenges. As such, we have conservatively lowered our valuations down to a floor of 0.1x PBV (from 0.2x PBV previously). Post-results, we have also slightly widened our FY22E/FY23E losses by 5%/14%, after accounting for weaker project margins.

Risks to our call include: sooner-than-expected successful board and financial restructuring to return the company on the path of profitability.

Source: Kenanga Research - 14 Dec 2021