Job prospects adversely affected by debt

■ 9MFY1/22 core net loss of RM2.1bn was higher than our RM1.9bn loss forecast for FY22F, and consensus’s RM1.4bn loss estimate.
■ Reiterate Reduce with a lower TP of 2.5 sen, as we widen our loss forecasts, roll forward to end-CY22F, and transition from SOP/DCF to RNAV method.
■ SAPE is in a liquidity crisis, and there are no easy roads ahead. Asset sales may not yield desired values and may result in significant asset impairments.

Very large E&C project losses persisted into 3QFY22

3QFY22 core net loss of RM470m was significantly worse than 3QFY21’s RM45m loss, due to losses at ongoing E&C projects on extra costs incurred and bid prices that were too low in hindsight. The Yunlin offshore windfarm installation project in Taiwan and the CPP EPCIC job for ONGC’s KG-DWN 98/2 development project in India remained the most troublesome projects. SAPE claimed that it incurred RM130m in Covid-19 related costs in 3QFY22, with RM560m incurred since the pandemic began; RM528m has yet to be settled by its clients. Surprisingly, the 3QFY22 core net loss remained very high
despite enormous provisions for foreseeable contract losses in the immediately preceding 2Q; this may be because project execution costs have continued to negatively surprise SAPE. The reported net loss in 3QFY22 was made worse by a RM212m provision against asset(s) to be sold (industry newspaper Upstream reported this to be the Sapura 3000, one of SAPE’s prized heavy-lift pipelay barges, as well as several laidup tender drilling rigs), suggesting that SAPE’s ‘value-in-use’ method for valuing its E&C vessels and drilling rigs is not conservative enough relative to actual realisable values.

SAPE may be missing out on lucrative jobs due to liquidity issues

For the second quarter running, SAPE has cautioned that it is facing a liquidity crunch. Creditors continue to demand to be paid for work done and some may have stopped work in the meantime. Upstream reported that Petronas in Dec 2021 had chosen to invite local competitor MMHE and South Korea’s Hyundai Heavy Industries to participate in the FEED for Phase 2 of the Kasawari sour gas development offshore Sarawak, leaving SAPE out in the cold; Upstream said that SAPE’s financial woes were a determining factor for its exclusion, a view that SAPE neither confirmed nor denied. If true, this may be the second or third major project that SAPE has lost out on due to concerns over its financial strength. Upstream reported in Apr 2021 that SapuraOMV (a 50:50 JV between SAPE and Austria’s OMV) awarded the Jerun CPP contract to MMHE, while MMHE also won the Phase 1 Kasawari CPP contract in Jul 2019; in both instances, MMHE won the bids against SAPE. Is SAPE’s suffocating debt burden constricting its job-intake airway as well? SAPE’s diminished prospects are reflected in its bid book, which declined from RM35bn as at 31 Jul 2021, to RM22bn as at 31 Oct. Upside risks include a reset plan in the making with PwC and Rothschild & Co as advisors and successful discussions with clients to accelerate cash receipts and revise EPCIC contractual terms, with creditors extending payment deadlines and financiers for support via existing credit lines.