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CGS-CIMB: Sapura’s survival hinges on debt restructuring success

Publish date: Tue, 28 Jun 2022, 01:26 PM

CGS-CIMB Research has reiterated its “reduce” call on Sapura Energy Bhd with an unchanged target price of 0.5 sen as it foresees the global integrated oil & gas (O&G) outfit continuing to face liquidity crunch and execution challenges in addition to complex debt restructuring.

Yesterday (June 28), Sapura reported headline profit of RM91.9 mil for its 1Q FY1/2023 attributed mainly to a foreign exchange (FX) gain of RM175.9 mil (1Q FY1/2022: net loss of RM97.07 mil).

This compares favourably against the research house’s RM570 mil and Bloomberg consensus’s RM580 mil full-year loss forecasts. Without the appreciation of the greenback in recent times, Sapura would have reported a 1Q FY1/2023 core net loss of RM84 mil, according to CGS-CIMB Research.

“Despite the sequentially-better results, many challenges remain with legacy loss-making contracts to make up between one-quarter and one-third of FY1/2023F revenues,” opined analyst Raymond Yap in a results review.

“(This) extends into FY1/2024F with respect to the troubled CPP (central processing platform) fabrication contract for ONGC’s (Oil and Natural Gas Corp Ltd) Block KG-DWN 98/2 project; we are (also) concerned about additional cost provisions despite the 4Q FY1/2022 kitchen-sinking exercise.”

With regard to Sapura’s Practice Note (PN) 17 status whereby the group’s shareholders’ equity of RM157 mil remained below the critical threshold of RM5.4 bil (being 50% of its paid-up share capital), CGS-CIMB Research said Sapura would still need to have at least RM40 mil in shareholders equity which is just a tad lower than its current position of RM157 mil in relation to the size of its potential annual losses.

“Hence, the success of Sapura’s debt restructuring is critical to avoid a delisting. Upside risks include Sapura securing new sources of equity and successful debt-to-equity swap exercises,” added the research house.

Elsewhere, PublicInvest Research expects project executions to remain challenging for Sapura given difficulties in managing costs arising particularly from its legacy projects.

“We gather that the exposure to legacy contracts during the quarter is around 35% which will be reduced to 25% by 4Q 1/FY2023,” noted analyst Nurzulaikha Azali.

“As such, we foresee the group’s profit margins to remain volatile particularly in its E&C (engineering and construction) segment though outstanding order book is relatively healthy at circa RM5.3 bil.”

Meanwhile, Sapura’s order book for drilling segment stands at RM3 bil with utilisation remaining at eight rigs going into 2Q FY1/2023. This segment recently secured RM1.6 bil worth of new contracts from PTTEP, ExxonMobil, EnQuest, and Shell.

“It plans to dispose three rigs by year-end. As for the E&P (exploration and production) segment, higher oil prices have benefited the business, resulting in higher realized lifting price by 35%,” suggested PublicInvest Research.

“That said, current production is affected by the downstream cutbacks at the MLNG (Malaysia LNG) plant due to unplanned shutdowns. This is expected to resume at full capacity when MLNG is fully restored in August 2022.”

All-in-all, the research house retained its “neutral” rating on Sapura with an unchanged sum-of-parts (SOP)-derived target price of 5 sen.

At 10.03am, Sapura was up 0.5 sen or 11.11% to 5 sen with 78.84 million shares traded, thus valuing the company at RM799 mil. – June 28, 2022

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