• Keep SELL, new MYR0.02 TP from MYR0.05, 50% downside. Following Sapura Energy’s disappointing FY22 (Jan) results, we do not expect the group to turn around in the next few years. This is because its core businesses still face multiple operational challenges under the current environment. There are prevalent risks amidst its on-going debt restructuring exercise, and any further equity funding would be highly dilutive at the current share price.

• Big miss. The group’s 4QFY22 core loss was at MYR1.2bn. This brought its FY22 core loss to MYR3.1bn, at 150% of the Street’s full-year forecasted loss – mainly due to weaker margins. No dividend was declared, as expected.

• Results review. 4QFY22 turnover plunged by 69% QoQ and YoY, due to a lower percentage of work completion recognised, due to the recognition of foreseeable losses and higher project costs. As such, its core loss widened (-1.8x QoQ; -5.7x YoY) to MYR1.2bn, after stripping off MYR3.3bn in goodwill impairments and MYR2.1bn in PPE impairments. FY22 core loss widened by 12x to MYR3.1bn, dragged by liquidated damages recognised, cost overruns, contract de-scoping, and the reversal of unapproved claims.

• Challenging outlook. With the breach of certain financial covenants, the total MYR10.7bn borrowings remain as current liabilities. Following the successful application for a proposed scheme of arrangement (SOA) and a restraining order from the High Court, Sapura Energy will have to finalise and execute the proposed SOA and seek new sources of funding. Despite so, we do not discount the possibility of the company being classified under PN17, if there is a deficit in the adjusted shareholders’ equity or if its auditor expresses an adverse or disclaimer opinion, or modified opinion with emphasis – with respect to the ongoing concerns over its latest audited accounts. While its orderbook stands at MYR6.6bn, we believe the group will find it challenging to replenish the contracts from the MYR28bn tenders – given its current financial situation. The drilling segment is expected to deliver stable cash flow, with the expectation of nine rigs being operational.

• SELL. We project Sapura to incur losses ranging from MYR318m to MYR642m over FY23-25. Our SOP-based TP drops to MYR0.02 (from MYR0.05), assuming 20% of total debt was converted to equity based on a conversion price of MYR0.10/share. Our share base is enlarged by 21.4bn or 1.2x. Our TP has also includes 6% discount applied, based on our ESG score of 2.7. Monetisation of SapuraOMV Upstream is an option, and any further equity raising would be highly dilutive at the current share price. Upside risks: Better- than-expected project execution, and stronger-than-expected contract flow.

Source: RHB Research - 21 Mar 2022