• Reiterate SELL and MYR0.02 TP, 50% downside. Sapura Energy’s FY24 (Jan) results missed estimates, largely dragged by a higher cost base for key operating segments. We remain cautious on its engineering & construction (E&C) segment’s profitability. The Edge reported that TotalEnergies and Mubadala are frontrunners to acquire its 50% stake in SapuraOMV. Such a plan is essential to reset SAPE. Maintain SELL, as SAPE’s holistic debt and equity restructuring – highly dilutive, in our view – is inevitable for it to get out of the woods.

• Below expectations. SAPE’s FY24 core loss of MYR980m came in below expectations, mainly dragged by weaker-than-expected margins. No dividend was declared, as expected.

• Results review. SAPE recorded a MYR589m core loss in 4QFY24 after stripping off MYR126m in FX losses and MYR14m in PPE impairment losses – its worst performing quarter in the past two years. Core losses widened by 1.6x to MYR589m in 4QFY24, largely due to softer E&C numbers, as a result of lower progress from ongoing projects as well as a weaker E&P arm which slipped into losses of MYR182m (from MYR74m profit in 3QFY24). We understand there was a write-off of capitalised exploration costs recognised in 4QFY24. Cumulatively, FY24 losses widened by 4.7x YoY to MYR980m, no thanks to weaker contributions from all three key segments.

• Outlook. As there was no contract win announced, its orderbook shrank by 7% QoQ to MYR5bn as of 4QFY24. Orderbook replenishment remains one of its biggest challenges, with limited access to bank guarantees and working capital. The drilling segment is expected to deliver a stable performance, as 10 out of 11 rigs are under charter contracts. Meanwhile, the Edge reported that TotalEnergies and Mubadala are frontrunners to acquire its 50% stake in SapuraOMV. The offer price is not known, but news reports had previously put it at USD1.2bn. The High Court granted SAPE and some of its wholly- owned subsidiaries an extension of the restraining order for a period of three months from 11 Mar 2024, allowing it to finalise the proposed Schemes of Arrangement for the approval of its creditors. The standstill period with the financiers is extended until 10 Jun 2024.

• We widen our FY25F loss estimate by 6% on higher operating costs. Our SOP-based TP is largely unchanged at MYR0.02, inclusive of a 10% ESG discount. We have assumed that 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. Upside risks: Better-than-expected project execution and stronger-than-expected contract flow. Forecasts and Valuation Jan-23 Jan-24 Jan-25F Jan-26F Jan-27F Total turnover (MYRm) 4,551 4,258 4,576 4,676 4,694 Net profit (MYRm) (172) (980) (406) (323) (345) Net profit growth (%) (94.7) 470.6 (58.6) (20.3) 6.7 Recurring P/E (x) na na na na na P/B (x) na na na na na P/CF (x) na na na na na Dividend Yield (%) na na na na na EV/EBITDA (x) 18.2 10.4 8.4 8.4 8.4 ROAE (%) na na na na na Net debt to equity (%) na na na na na Source: Company data, RHB

Source: RHB Research - 26 Mar 2024