The group’s losses continue to widen, amidst ongoing project costs and lower project completion. Overall, the group is currently facing liquidity crunch, with debt levels and overdue payables unsustainably high, coupled with difficulties in credit facilities. In a kitchen sinking exercise, the group had recognised a huge impairment of RM5.6b, resulting in a massive deterioration to the group’s book value. Reiterate UNDERPERFORM with a TP of RM0.005.

FY22 losses missed expectations. SAPNRG’s FY22 core loss of RM3.3b (arrived after stripping-off impairments, net forex, among other non-core items) – missing expectations against our/consensus loss estimates of RM2.5b/RM1.9b. The hugely disappointing losses were mainly due to the lower project completion coupled with higher project costs for its engineering and commissioning (E&C), and operations and maintenance (O&M) segments. No dividends were announced, as expected.

Deep losses reflecting dire state. YoY, FY22 core losses widened >21x largely due to the aforementioned lower project completion and higher costs for its E&C and O&M segments. For the quarter of 4QFY22, the group’s core losses widened >2x QoQ and >6x YoY, due to similar reasons. Overall, a huge portion of the group’s core losses were from legacy contracts, whereby execution challenges, project delays, liquidity crunches, and unfavourable contract terms with disproportionate risks have resulted in the recurringly widening losses.

Unprecedented challenges. The group is currently facing an unprecedented liquidity crunch, with its debt and payables levels unsustainably high, coupled with challenges in credit facilities. In a massive kitchen sinking exercise, the group has undertaken a huge impairment of RM5.6b in FY22. This, coupled with the ever-increasing accumulated losses, has resulted in the group’s equity book value to deteriorate by over 97% throughout the period. To-date, the entirety of the group’s borrowings totalling RM10.7b is still being reported as short- term debt, in accordance to MFRS standards, due to breach of loan covenants.

Reiterate UNDERPERFORM, with TP of RM0.005. Following the massive write-down of the group’s book value, its recurring losses, unprecedented liquidity crunch and with its overall financials currently in dire straits, we have ascribed a floor TP of RM0.005 (lowered from RM0.04 previously pegged to 0.1x PBV) – implying FY22A PBV of 0.3x.

Post results and model update, we have widened our FY23E loss assumption by 17%, while simultaneously introducing FY24E numbers.

Post impairments, the stock is currently trading at FY22A PBV of 2.6x – which we feel is hugely unjustifiable given the group’s deteriorating fundamentals.

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

Source: Kenanga Research - 21 Mar 2022