SAPNRG announced a two-year contract extension for its “Sapura Esmeralda” PLSV, worth USD130m (~RM580m). Despite being positive on the news, we still believe it to be insufficient to stage a turnaround for the company. The group is still classified under PN17, with material uncertainty on its going concern status and debts remaining unsustainably high at ~RM10.7b – which are all classified as short-term borrowings in its balance sheet. Maintain UNDERPERFORM with TP of RM0.005.

Contract extension for Sapura Esmeralda PLSV. SAPNRG announced that its join venture entity in Brazil with Seabras has been awarded an extension of a charter and service contract by Petrobras for the pipe laying support vessel (PLSV) “Sapura Esmeralda". The extension is for two years commencing immediately, with a contract value of USD130m (~RM580m).

Our takeaways are as follows:

1. Positive on the extension contract. Overall, we are positive on the extension contract, especially given the group’s current financially distressed situation. This is in-line with the group’s “reset” strategy of attempting to secure more asset-based contracts (e.g. via its vessels and drilling rigs), as such form of contracts require less working capital outlay. The company’s lack of access to credit facilities has made project execution for typical engineering and construction jobs highly uncertain. This is also the group’s second YTD contract win announcement – bringing YTD wins to ~RM3.3b, with its orderbook at ~RM8b.

2. Struggling position still unchanged. Despite the positive news of a contract extension, we believe this is still greatly insufficient to stage a financial turnaround for the company. The stock is currently still classified under PN17, with its auditors highlighting material uncertainty related to its going concern status. The group still carries an unsustainably high debt of ~RM10.7b – all of which are classified as short-term borrowings in its balance sheet. As such, we feel some form of external intervention – e.g. restructuring of current loan structures, borrowings haircut from banks, or the emergence of an angel investor, may be necessary before the company could expect a sustainable turnaround.

Post contract extension, we made no changes to our FY23-24E numbers, as we deem the contract extension as falling broadly within our estimated assumptions. The group is still expected to continue its loss-making trend throughout FY23-24, barring any successful restructuring of its financials and operations.

Maintain UNDERPERFORM, with unchanged TP of RM0.005 – pegged to 0.5x PBV on its 1QFY23 net assets. While we accord a 1- star ESG rating to SAPNRG which entails a 10% downward adjustment to our TP based on ESG, we keep our TP as it is already next to nil.

Risk to our call include: sooner-than-expected successful restructuring.

Source: Kenanga Research - 3 Aug 2022