Sapura Energy (SapE) reported headline loss of RM3.3bn in 4QFY23 mainly due to RM2.6bn of impairments and RM396.6m of foreign exchange loss. Excluding these items, SapE reported core net loss RM286.3m for the quarter, bringing its core loss for the full year FY23 to RM576.0m, narrowing from RM2.3bn in FY22. The full year numbers exceeded our forecast of net loss RM717.4m, but below consensus’ net loss RM437.5m. Notably, its Engineering and Construction (E&C) segment showed positive EBITDA. However, securing and executing E&C contracts remains challenging given tight liquidity and cost pressures in its legacy contracts. Additionally, SapE’s PN17 regularization plan has taken a setback with RM3.0bn in negative equity despite SapE obtaining a letter of support from white knight worth RM1.8bn. As such, we cut our FY24-25 earnings forecast and downgrade our call to Underperform (from Neutral) with the SoTP derived TP of RM0.02 (from RM0.05).

• Positive E&C segment but challenges remain. E&C segment registered a positive EBITDA of RM123m in 4QFY23, representing an EBITDA margin of 18%. However, the segment is still having difficulties in securing new contracts amid its current issues, reflected by it having missed tender opportunities worth USD2.5bn due to lack of working capital and unavailability of bank guarantees. SapE is also negotiating for price adjustments on its legacy contracts due to cost pressures, though the upside is limited as the negotiation could be just to achieve cash-neutral positions.

• The RM2.6bn in impairments are resulting from changes in revised business outlook for both the E&C (RM1.1bn) and Drilling (RM1.5bn) segments. Due to persistent challenges in the E&C segment, SapE has reduced its growth assumptions in deriving value in use (VIU) and terminal value (TV) for its goodwill. In the Drilling segment, RM1.1bn out of RM1.5bn impairment is due to revised VIU and fair value (FV) for its rigs amid less optimistic prospects and higher operating cost. Overall, both segments are also impacted by higher discounted rate arising from high interest rate environment.

• RM3.0bn negative equity. In sourcing new funding, SapE has obtained a letter of support from a white knight with new injection of RM1.8bn. It has also completed an independent valuation for selected assets to be divested worth RM2.25bn, as settlement to its creditors. Nevertheless, we view the outlining of a PN17 regularization plan within 2 months as an uphill, more so with this new development of an RM3.0bn shortfall in equity. Further lifeline will have to come from extensions by regulators, if any.

Source: PublicInvest Research - 31 Mar 2023