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1H22 results came in below

TP cut to MYR0.05; need to put the house in order

While SAPE has been able to refinance its debts in the past, its position remains vulnerable. Stretched balance sheet, tight cashflows, poor execution and continuous cost overruns will weigh down on its ability to recover. These challenges will outweigh the recovery in the oil market. There is also a greater need to restructure its operations/assets. Assets divestment is imperative. We cut FY22-24 earnings, not expecting SAPE to return to the black. Consequently, we cut our SOP-based TP by 50%.

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2QFY22:MYR1b provisions, breached debt covenants

Revenue fell 49% QoQ to MYR747m, with LBITDA of MYR10m in 2QFY22. Headline net loss of MYR1.5b included substantial one-offs (-MYR1.1b), largely from MYR1b in provisions from foreseeable losses and higher project costs (notably from its Taiwan (Yunlin) and India (98/2) projects). Excluding that, SAPE reported wider QoQ core net loss of MYR436m in 2QFY22 (vs. –MYR12m in 1QFY22), substantially below ours/ consensus FY estimates. The LBITDA impact led to a breach on its loan covenant; its MYR10b LT borrowings re-classified as ST debt in 2QFY22.

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Challenging outlook; cost management concern

We cut FY22-24 estimates post results, largely on lower E&C earnings/ margins and lower associate profits. We now expect SAPE to be in the red over the next 3 FYEs (vs. a recovery from FY23 previously). The orderbook (ex-JV) has declined QoQ, from MYR8.4b in 1QFY22 to MYR7.5b in 2QFY22, rendering a replenishment risk, while the frequency of cost-overruns/ provisions is a growing greater concern, which
underlines its poor execution and cost management capabilities.

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A dire need to restructure and refinance

With this setback, the need to divest/ monetize its ageing assets grows in importance, for its stretched balance sheet remains a concern (1.3x net gearing). A continuous cost-down exercise is inevitable as well as reviewing its bids processes. Our TP cut (-50%) reflects lower valuations for its E&C and PLSVs.