• Maintain SELL, MYR0.02 TP, 50% downside. Despite booking narrower losses, Sapura Energy’s 9MFY23 (Jan) operating cash flow remained negative, at -MYR81m, vs 9MFY22’s MYR197m. Orderbook replenishment remains one of its biggest challenges, with limited access to bank guarantees and working capital during the restructuring phase – on this, the next few months will be critical. We make no change to our stock rating, as  SAPE’s holistic debt and equity restructuring exercise – which will be highly dilutive, in our view – is inevitable for it to find its way out of the woods.

• Within our expectations. SAPE’s 9MFY23 core loss of MY290m (after stripping off a MYR151m FX gain, MYR20m inventories write-down and  MYR9m PPE disposal gain) came in within expectations, at 69% and 59%  of our and Street full-year forecasted losses. We expect the company to be in the red for another quarter in 4QFY23, due to the uncertainty in its engineering and construction (E&C) segment’s margins.

• Results review. Its 3QFY23 core losses widened by 67% QoQ, no thanks to a weaker E&C unit (lower margins) and lower drilling contributions (-99%  QoQ, as well as lower margins and ASPs amidst higher utilisation). This is being partially cushioned by its stronger exploration and production (E&P)  arm, with the absence of an exploration well write-off. 9MFY23 core losses narrowed by 85%, mainly from lower opex and cost provisions (E&C and operations and maintenance (O&M)) amidst higher rig utilisation and daily charter rates.

• Outlook. SAPE’s orderbook declined by 12% QoQ to MYR6.8bn.  Orderbook replenishment remains a major hurdle, with its limited access to bank guarantees and working capital. The drilling segment is expected to  stay resilient, with 10 out of 11 rigs operational in 3QFY23. Despite  narrowed losses in 9MFY23, operating cash flow turned negative  (-

• SELL. With no changes in our estimates, our SOP-based TP remains at  MYR0.02 post earnings adjustments and after rolling our valuation base year to FY24F. Note: We have assumed 20% of total debt that 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 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 Securities Research - 9 Dec 2022