Sapura Energy (SapE) reported a headline net loss of RM2.6m attributed mainly to foreign exchange (FX) gains of RM74.2m. Excluding this, the Group reported a core net loss of RM76.9m in its 2QFY23 results, though narrowing its core net loss for 1HFY23 to RM160.9m against RM538.3m in 1HFY22. SapE also reported positive EBITDA of RM562.2m as compared to negative EBITDA of RM1bn in the same period last year. While revenue improved 57% YoY, we opine that overall performance was helped by reversal on claims and liquidation damages though value is unverified at this juncture pending disclosure in the analyst briefing. To recap, the Group reported claims reversal and liquidation damage of RM93m and RM26m respectively in 1QFY23. These results are deemed in line with our expectations with a FY23 forecasted net loss of RM717.4m, though missing consensus estimates of an RM571m net loss. We view the execution of projects to remain challenging given the tough operating environment. As such, we maintain our FY23-25 earnings forecast, with profit margins are expected to remain volatile. Our Neutral call and sum-of-parts derived TP of RM0.05 is retained.

• Narrowing losses mainly due to reversals. SapE reported a headline profit of RM2.6m in 2QFY23 attributed mainly to FX gain of RM74.2m. Excluding this, the Group reported a core net loss of RM76.9m, improving from a core net loss of RM84m in the previous quarter. Headline EBITDA improved 25.2% QoQ to RM312.5m, corresponding with a positive EBITDA in all segments (E&C: RM38m, O&M: RM47m, drilling: RM150m), which is mainly attributable to commercial settlements from certain contracts in its E&C (engineering) segment, materialisation of additional claims in the O&M (maintenance) segment, and improved rig utilisation and day rates in its drilling business.

• Outlook remains uncertain. We gather that the exposure of legacy contracts will only reduce to 25% in 4QFY23. As such, project execution will remain challenging given the tough operating environment especially in managing costs for legacy projects in the E&C segment. Given the prevailing (and elevated) cost of material prices, some projects have also been deferred to next year. We foresee SapE’s profit margins to remain volatile though topline will be supported by relatively healthy outstanding orderbook of c. RM7.7bn, and bid book of approximately RM24.4bn. The Group’s drilling segment is expected to commence operations in 2HFY23 for its contracts with PTT Exploration and Production.

Source: PublicInvest Research - 27 Sept 2022