Sapura Energy facing liquidity challenges

Project execution is a factor that investors remain cautious of the company’s prospects


SAPURA Energy Bhd may not be able to turn in a profit in the near to medium term as the company still suffers weaker than expected new project intake.

The oil and gas support services company’s stretched finances, and project execution is a factor that investors remain cautious of the company’s prospects despite under a new management team.

“Sapura Energy exercised greater caution on its bids and misestimate the seabed conditions offshore Taiwan and piling work for the offshore wind turbines is taking longer than expected.

“The central processing platform job for Oil and Natural Gas Corp Ltd (ONGC) had been delayed multiple times by Covid-19 infections at the group’s Lumut yard, resulting in the narrowing of the window for work in India due to the monsoon,” according to CGS-CIMB Securities Sdn Bhd in a note last Friday.

The brokerage added that these delays have resulted in the widening of the cost estimates for the completion of those jobs, and as total expected costs have exceeded the contractual values, provisions for foreseeable losses were accrued.

CGS-CIMB has revised down its earnings forecasts and target prices (TPs) for Sapura Energy as a result and downgraded it to ‘Reduce’ from ‘Hold’ with a lower sum of parts-based TP of 4.5 sen.

It added that Sapura Energy’s financial year 2022 (FY22) core loss per share forecast has widened 13-fold due to project cost overruns.

FY23 to FY24 core loss per share forecasts have also widened 163% and 316% respectively on weaker than expected new project intake as Sapura Energy exercised greater caution on its bids.

CGS-CIMB stated that Sapura Energy’s engineering and construction (E&C) revenues are recognised using the percentage of completion method and any upward revision in the expected total project costs naturally reduce the estimated completion rate (which is calculated as the costs incurred to-date divided by the expected total costs).

This has resulted in a downward revision in cumulative revenues which then require cumulative revenues recognised to-date to be partially reversed in its second quarter of financial year 2022 (2QFY22).

CGS-CIMB noted Sapura Energy has incurred RM400 million in Covid-19-related costs since the pandemic started but has not yet been able to recoup them from its clients.

It stated that Sapura Energy needs to overcome its liquidity situation.

Sapura Energy’s president and founder Tan Sri Shahril Shamsuddin has handed over the reins to Datuk Mohd Anuar Taib on March 23, 2021, and the new president is now exercising greater circumspection when bidding for new projects.

Sapura Energy has acknowledged its cash position was tight and some suppliers are refusing to do further work until they are paid for sums overdue.

“Sapura Energy is negotiating with its banks for further liquidity, on which its ability to survive. The group’s net gearing has reached 3.9x, assuming goodwill of RM5.1 billion is fully written off,” the CGS-CIMB report added.

Similarly, MIDF Amanah Investment Bank has trimmed its TP on Sapura Energy to 14 sen from 16 sen previously due to change in earnings forecast and rolling over its valuation of FY23.

MIDF has revised its FY22 and FY23 earnings forecast for Sapura Energy downwards by 33.6% to RM66.9 million and 18.8% to RM128.5 million respectively in consideration of the reported foreseeable losses and delays in project schedules.

This is in addition to the current restructuring of the company to benefit from the change in industrial trend.

MIDF has maintained its ‘Buy’ call on Sapura Energy due to its robust orderbook on new prospects and contract wins for its business segments.

“The gas and oil prices are expected to remain high until the end of the current year amid supply crunch and growing demand.

“The rising prices, along with the gradual reopening of international borders from the pandemic recovery, posed a great opportunity for Sapura Energy to secure more contracts in its E&C and exploration and production divisions, as well as its renewables ventures,” it noted.

MIDF noted that despite Sapura Energy’s strong orderbook, uncertainties will continue to affect the group’s performance.

It added that liquidity concerns remain with the group’s E&C vendors and clients and hamper the turnaround efforts.

“Despite the inarticulacy of the pandemic and its impact to Sapura Energy’s current ongoing projects, the group continues to be invited to bid for projects in various geographies solely from the conviction of its capabilities as a prominent oil and gas service provider.

“The group has a more focused bidding strategy resulting in a more targeted bid book,” it noted.

For 2QFY22, Sapura Energy sank into the red with a net loss of RM1.52 billion versus a net profit of RM23.74 million in 2QFY21.

Revenue fell by 38.7% to RM747.12 million from RM1.22 billion a year ago.

For the cumulative six months ended July 30, 2021 (1HFY22), the group registered a net loss of RM1.61 billion against a net profit of RM37.95 million a year ago, while revenue fell 13.9% year-on-year to RM2.22 billion.

Sapura Energy has thus far reported a third straight quarter of losses due to recognition of foreseeable losses and higher project costs.