• Keep SELL and MYR0.02 TP, 60% downside. Post earnings conference call, we believe that Sapura Energy’s operating environment has improved, backed by more robust upstream activities and elevated oil prices. The continuous negotiation and phasing out of legacy contracts will lead to margin improvement. That said, near-term replenishment, in our view, could be limited given its weak financials, and a highly dilutive restructuring plan is needed to resolve the unsustainable debt level.

• Restructuring is ongoing. SAPE’s total borrowings stood at MYR11bn as of 2QFY23 (Jan) and continued to be classified under current liabilities with the breach of financial covenants. The Corporate Debt Restructuring Committee of Malaysia (CDRC) has accepted SAPE’s application to mediate its debt restructuring negotiations with lenders, and the company is expected to submit a proposal for a restructuring of its debts within 60 days from 1 Sep. Management did not guide on the comfortable debt level post restructuring but reiterated that cash conversation via continuous cost optimisation and a divestment plan are also top priorities. SAPE has completed the disposal of Sapura 3000 in August and is in the midst of disposing three tender assisted drilling rigs – Sapura T-19, Sapura T-20 and Sapura Setia – for USD8.2m. Apart from the potential conversion of debt to equity being part the restructuring plan, we do not discount the possibility of a partial sale of its 50% stake in SapuraOMV, its upstream exploration and production arm.

• Focus on cash generation and profitability. SAPE’s orderbook stood at MYR7.7bn (-7% QoQ) as of 2QFY23, of which 20% of it is related to legacy contracts to be recognised in 2HFY23F and FY24F. Bidbook is guided at MYR24bn, with a 46:54 split between Eastern Hemisphere and Western Hemisphere. We believe replenishment in the near term may not be strong given its weak financials. That said, the drilling segment is expected to improve gradually from the current eight rigs being operational to 10 by end FY23 amidst improvement in daily charter rates. For the energy arm, net lifting fell by >20% QoQ to 2.1 mboe in 2QFY23. We expect net lifting to improve as there is no planned maintenance and the Malaysia Liquefied Natural Gas or MLNG complex at Bintulu is now operating at optimal level.

• SELL. With no changes in our forecasts, our SOP-based TP is kept at MYR0.02 post earnings adjustments and rolling our valuation base year to FY24F. Note, we have assumed 20% of total debt 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 also includes a 6% discount applied based on our ESG score of 2.7. Upside risks: Better-than-expected project execution and stronger-than-expected contract flow.

Source: RHB Research - 28 Sep 2022