• Keep SELL and MYR0.02 TP, 50% downside. 1HFY23 (Jan) results beat expectations on a better performance from the engineering & construction (E&C) and drilling divisions. Despite narrowed losses, operating cash flow went into negative territory at -MYR74m, vs 1HFY22’s MYR29m. We reiterate our SELL call, as a holistic debt and equity restructuring – highly dilutive, in our view – is inevitable for Sapura Energy to be out of the woods.

• Above expectations. The 1HFY23 core loss of MY161m (after stripping off a MYR250m FX gain) came in above expectations at 24% and 28% of our and Street full-year forecasted losses, thanks to better-than-expected E&C margin and drilling contribution.

• Results review. 2QFY23 revenue improved by 21% QoQ mainly led by higher E&C project billings and drilling. As such, core losses narrowed by 8%, masking the weaker exploration and production (E&P) arm no thanks to an exploration well write off. Cumulatively, 1HFY23 core losses narrowed by 89%, mainly driven by a lower opex and cost provision (E&C and operations and maintenance (O&M)) as well as better drilling (higher rig utilisation and daily charter rates).

• Outlook. SAPE’s orderbook declined by 7% QoQ to MYR7.7bn. The drilling segment is expected to improve gradually from the current eight rigs being operational to 10 by end FY23. Despite narrowed losses seen in 1HFY23, operating cash flow went into negative territory, at -MYR74m, as compared to 1HFY22’s MYR29m. In view of its stretched cash flow, SAPE will continue its strategy of pursuing contracts with relatively lower working capital requirements. For the energy arm, net lifting fell by >20% QoQ to due to an unplanned shutdown at the Malaysia Liquefied Natural Gas or MLNG complex at Bintulu, Sarawak. The Corporate Debt Restructuring Committee of Malaysia (CDRC) has accepted SAPE’s application to mediate its debt restructuring negotiations with lenders and the company is expected to submit a proposal for a restructuring of its debts within 60 days from 1 Sep. Cash conversation via continuous cost optimisation and asset monetisation initiatives are also top priorities.

• SELL. We reduce FY23F-25F losses by 10-36% on better E&C margin and higher drilling contribution. Our SOP-based TP is kept at MYR0.02 post earnings adjustments and 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 Research - 27 Sep 2022