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Paying a heavy price for past misjudgments

  • The massive 1HFY1/22 core net loss of RM1.7bn compared unfavourably against our RM139m full-year loss forecast and consensus’s RM175m loss.
  • Cost overruns on E&C projects in Taiwan and India necessitated a RM1bn provision for foreseeable losses in 2Q, on top of Covid-19-related opex.
  • Downgrade from Hold to Reduce, with a lower SOP-based TP of 4.5 sen, as we widen our loss forecasts on SAPE’s project miscalculations.
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Miscalculations weigh on 2QFY1/22 results (ended 31 Jul 2021)

SAPE reported a RM1.5bn core net loss in the 2QFY22, vs. a small profit of RM24m in 2QFY21. This was the result of (1) a RM1bn provision for foreseeable losses on two projects, i.e. the Yunlin offshore wind farm installation in Taiwan, and central processing platform (CPP) fabrication job for ONGC in India; (2) revenue reversal of c.RM0.7bn related to those projects; (3) Covid-19-related compliance costs of RM69m; (4) RM47m share of the write-off of dry well drilling costs at SapuraOMV; and (5) another RM47m share of the reversal of revenues at SapuraOMV’s Peninsular Malaysia (PM) oil blocks, relating to revenues earlier recognised between 1 Feb 2021 (when the sale to Jadestone became effective) and 31 Jul 2021 (when the sale was ultimately completed).

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Yunlin offshore wind farm and ONGC’s CPP are problematic

SAPE misestimated the seabed conditions offshore Taiwan and piling work for the offshore wind turbines is taking longer than expected. The CPP job for ONGC had been delayed multiple times by Covid-19 infections at SAPE’s Lumut yard, resulting in the narrowing of the window for work in India due to the monsoon. These delays have resulted in the widening of the cost estimates for the completion of those jobs, and as total expected costs now exceed the contractual values, provisions for foreseeable losses
were accrued. As E&C revenues are recognised using the percentage of completion method, upward revisions 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), resulting in a downward revision in cumulative revenues, which then require cumulative revenues recognised to-date to be partially reversed in 2QFY22. On top of this, SAPE has incurred RM400m in Covid-19-related costs since the pandemic started but has not yet been able to recoup them from its clients.

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Liquidity challenges need to be overcome

The two troubled projects were secured during the tenure of then-president and founder Tan Sri Shahril Shamsuddin, who handed over the reins to Datuk Mohd Anuar Taib on 23 Mar 2021. The new president is now exercising greater circumspection when bidding for new projects. However, SAPE acknowledged that its cash position was tight and some suppliers are refusing to do further work until they are paid for sums overdue. SAPE is negotiating with its banks for further liquidity, on which its ability to survive depends. SAPE’s net gearing has reached 3.9x, assuming goodwill of RM5.1bn is fully written off.