Results severely disappointed, with 2QFY22 recording one of the group’s worst ever quarter – plunging into a deep core loss of RM1,572m. The effects of the pandemic have led to project execution delays and costs escalation, with management expecting current hurdles to persist well into 2HFY22. The group is also facing liquidity issues with its vendors and clients, coupled with heightened balance sheet risks. Downgrade to UP with TP of RM0.07.

1HFY22 results a huge disappointment. 1HFY22 recorded core net loss of RM1,632 – a huge miss against our full-year loss forecast of RM184m and consensus of RM67m, dragged by severely poorer-than- expected engineering and construction (E&C) segment. No dividends were announced, as expected.

One of its worst ever quarter. For the 2QFY22 quarter, SAPNRG recorded core net loss of RM1,572m – a >26x widening of losses QoQ. This was mainly attributable to its E&C and operating and maintenance (O&M) segments plunging into steep losses due to lower percentage of completion recognised in the current quarter, resulting from recognition of foreseeable losses and higher project costs. Additionally, its exploration and production (E&P) also plunged into the red, despite the stronger crude oil prices, due to write-offs arising from the disposal of Peninsular Malaysia blocks during the quarter. Cumulatively, 1HFY22 plunged into deep losses, mostly dragged by the poorer E&C and O&M segments on similar aforementioned reasons.

New contract wins. The group had also announced job wins of: (i) two contracts from Santos in Australia, worth a combined RM942m, and (ii) pipe laying support vessels from Petrobras, under its Brazilian JV, worth RM1.7b. Combined, the total wins amounted to RM2.6b – bringing its order-book to RM7.5b.

Recovery taking longer than expected. Given the current impact of the pandemic to its operations, the group is faced with project execution delays primarily in Taiwan and India. This is further exacerbated by liquidity concerns with the group’s vendors and clients, further hampering its job execution ability. Management is expecting these challenges to continue to persist throughout the 2HFY22. Additionally, during the quarter, all of its long-term debt was reclassified into short- term debt – amounting to RM10.9b, due to breach of financial covenants, with its net-gearing ballooning to 1.3x during the quarter, from 1.1x in the previous quarter. That said, the group is hopeful of receiving a waiver from lenders for the breach, which will see these borrowings reclassified back to long-term debt in the coming quarter.

Downgrade to UNDERPERFORM (from OUTPERFORM previously). With the stock’s restructuring and recovery seemingly taking longer than earlier expected, coupled with heightened borrowings and liquidity risks, we downgrade the stock down to UNDERPERFORM. Our TP is lowered to RM0.07 (from RM0.21 previously), pegged to trough valuations of 0.2x on FY23E PBV (from 0.4x at mean previously). Post results, we widened our FY22E/FY23E loss assumption by 13x/4x after accounting for weaker E&C.

Risks to our call include: sooner-than-expected successful corporate and financial restructuring to return the company on the path of profitability.

Source: Kenanga Research - 1 Oct 2021