• Keep SELL and MYR0.02 TP, 50% downside. FY23 (Jan) results beat  expectations mainly led by unexpected lumpy liquidated damages reversal  and settlement claims. We are cautious over its engineering & construction  (E&C) segment’s profitability and orderbook replenishment amidst limited  working capital access. Despite securing a MYR1.8bn letter of support from  a white knight, we reiterate our SELL call, as a holistic debt and equity  restructuring – highly dilutive, in our view – is inevitable for Sapura Energy  to get out of the woods.

• Above expectations. FY23 core loss of MYR192m surpassed  expectations at 44% and 45% of our and Street full-year forecasted losses.  The positive deviation was mainly led by unexpected lumpy liquidated  damages reversal and settlement claims.

• Results review. SAPE managed to return to the black with a core net profit  of MYR118m in 4QFY23 from MYR129m core loss in 3QFY23. The  significant improvement is mainly led by liquidated damages reversal and  settlement claims for the E&C arm, masking its weaker drilling arm.  Cumulatively, FY23 core loss narrowed by 94%, mainly driven by a lower  opex and cost provision (E&C and operations and maintenance (O&M))  amidst higher rig utilisation and daily charter rates).

• Outlook. SAPE recognised MY2.6bn impairment on drilling assets and  goodwill (E&C and drilling) after revising its key assumptions ie revenue  CAGR, discount rates and etc. Its orderbook declined by 18% QoQ to  MYR5.6bn. Orderbook replenishment remains one of the biggest  challenges with limited access to bank guarantees and working capital. The  drilling segment is expected to stay resilient with 10 out of 11 rigs operating  in 1QFY24. In view of its stretched cash flow, the company will continue its  strategy of pursuing contracts with relatively lower working capital  requirements. The Proof of Debt (POD) exercise with its trade creditors is  nearing completion. MYR1.5bn of total POD submissions have been  verified and MYR1.3bn accepted. SAPE is looking to divest SapuraOMV as  part of the Proposed Restructuring Scheme (PRS). Meanwhile, the  company has received a MYR1.8bn letter of support from a white knight.

• SELL. Our loss estimates remain largely unchanged as we are still  uncertain over the E&C division’s profitability. As such, we maintain our  SOP-based TP at MYR0.02. 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 Securities Research - 31 Mar 2023