CGS-CIMB reiterates its ‘Reduce’ call on Sapura Energy with 5 sen TP

by AZALEA AZUAR / pic source: sapuraenergy.com

CGS-CIMB Securities Sdn Bhd has reiterated its ‘Reduce’ call on Sapura Energy Bhd with a target price (TP) of five sen.

The oil and gas company continues to face liquidity and execution challenges and a complex debt restructuring.

CGS-CIMB analyst Raymond Yap said in a note today that the group is restructuring its debts to avoid delisting.

“Sapura Energy’s auditors expressed material uncertainty in relation to its financial year 2022’s (FY22) financial accounts. Hence, Sapura Energy was classified as a PN17 (Practice Note 17/2005) company under Bursa Malaysia’s rules because as at April 30, 2022, Sapura Energy’s shareholders’ equity of RM157 million remained below the critical threshold of RM5.4 billion, being 50% of its paid-up share capital,” he explained in a research report.

Yap also warned that Sapura Energy will need to have at least RM40 million in shareholders equity where the uncertainty tag is lifted, as right now it is lower than the group’s RM157 million current position, compared to the size of its potential annual losses.

Yap also explained that one of the upside risks includes securing new sources of equity and successful debt-to-equity swap exercises.

“First quarter 2023 (1Q23) core net profit of RM92 million compares well against the massive 4Q22 core net loss of RM1.2 billion. 

“This was on account of heavy provisions in the immediately preceding quarter for loss-making engineering and construction (E&C) projects, cost overruns, liquidated damages and Covid-19 compliance costs.

“Sapura Energy also benefited from RM176 million in foreign exchange (forex) gains in 1Q23 compared to a RM26 million forex loss in 4Q22.”

He warned that the group would have suffered a core net loss of RM84 million in 1Q23 if the US dollar did not appreciate.

Moreover, its profit share from its 50%-owned SapuraOMV has increased to RM42 million from a share loss of RM20 million in 4Q22, due to the higher selling price of gas while its drilling pre-tax improved quarter-on-quarter (QoQ) on the back of better cost controlled.

CGS-CIMB noted that Sapura Energy still has to overcome many challenges with its contracts in order to catch up with its one-quarter and one-third of FY23 revenues which has also extended to FY24 despite improved financial results.

“We are concerned about additional cost provisions despite the 4Q22 kitchen-sinking exercise.

“E&C assets remain poorly utilised until the end of April 2022, with the Lumut fabrication yard utilisation at only 31% and the key E&C offshore vessels only 25% utilised,” Yap added.

Sapura Energy faces difficulties trying to secure bank guarantees and working capital, as well as winning E&C contracts due to its ability to remain liquid. But Yap felt there is hope as the group has successfully bagged a mix of E&C and drilling contracts worth RM2.7 billion.

On the other hand, Hong Leong Investment Bank (HLIB) has maintained its ‘Sell’ call on Sapura Energy with a TP of one sen based on its 0.5 times FY22 price-to-book as it is confident that the company can gain back its profit with more time.

This will not happen overnight but the bank is more concerned regarding the group’s operational liquidity from difficulties to obtain funding and its ability to win future jobs due to its balance sheet weakness.

HLIB equity research analyst Jeremie Yap expects the group’s situation to remain uncertain in FY23 as its orderbook stands at RM8.3 billion with RM23 billion of bids in progress.

“The group’s net debt continued to deteriorate, which ballooned to RM10.2 billion as of 1Q23 from RM9.9 billion at end-FY22.

“We think that it will be an uphill task for Sapura Energy to turn around its operations in the near-to-medium term due to  heightened cost overruns in its projects; liquidity issues from difficulties to obtain funding due to its balance sheet distress as it is now officially a PN17 company; job delivery and execution risks as Sapura Energy has yet to display a satisfactory track record in recent years; and inability to win jobs due to its challenged balance sheet,” he said in a research report.

The bank also revealed that its core net loss of RM203 million in 1Q23 was within its expectations between RM758 million to RM580.1 million.

It was mainly adjusted for net forex gains of RM176 million, RM93 million of Covid-19 additional claims and liquidated damages reversal worth RM26 million.

Based on its QoQ performance, Sapura Energy’s net losses have declined to RM203 million (from RM1.19 billion in 4Q22) on the back of lower operating expenses.

“Sapura Energy registered a core net loss of RM203 million (from a core net loss of RM9 million in 1Q22) which was due to significantly weaker performances from its major business segments, namely its E&C, drilling and exploration and production (accumulated earnings and profits) divisions,” Yap further added.

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