Survival hinges on debt restructuring
? 1QFY1/23 core net profit of RM92m compares favourably against our
RM570m and Bloomberg consensus’s RM580m full-year loss forecasts.
? Still, we consider the results broadly in line as SAPE’s quarterly earnings are
historically volatile and unreliable indicators of the full-year actual results.
? Reiterate Reduce with RNAV-based TP of 0.5 sen; SAPE continues to face
liquidity and execution challenges, as well as a complex debt restructuring.
Forex gains helped push SAPE into the black for 1QFY23
1QFY23 core net profit of RM92m compares well against the massive 4QFY22 core net
loss of RM1.2bn; this was on account of heavy provisions in the immediately preceding
quarter for loss-making E&C projects, cost overruns, liquidated damages, and Covid-19
compliance costs. SAPE also benefitted from RM176m in forex gains in 1QFY23, vs. a
RM26m forex loss in 4QFY22; without the appreciation of the US$, SAPE would have
reported a 1QFY23 core net loss of RM84m. SAPE also booked in a share of profit of
RM42m from its 50%-owned SapuraOMV in 1QFY23, up from a share of loss of RM20m
in 4QFY22, due to the higher selling price of gas. Drilling pretax losses narrowed qoq due
to better cost control. There were no exceptional items in 1QFY23.
Multiple challenges remain; recent contract wins lift the mood
Despite the sequentially-better results, many challenges remain with legacy loss-making
contracts to make up between one-quarter and one-third of FY23F revenues, and also
extending into FY24F with respect to the troubled CPP fabrication contract for ONGC’s
98/2 project; we are concerned about additional cost provisions despite the 4QFY22
kitchen-sinking exercise. E&C assets remain poorly utilised up to end-Apr 2022, with the
Lumut fabrication yard utilisation at only 31% and the key E&C offshore vessels only 25%
utilised. Winning E&C contracts remains difficult, as oil companies and main contractors
remain concerned about SAPE’s ability to stay liquid enough to complete the jobs;
securing bank guarantees and requisite working capital is also difficult. Still, there is hope
with SAPE announcing on 16 Jun 2022 that it had won RM2.7bn in new contracts,
comprising a mix of E&C and drilling contracts. SAPE is also cautious in its new
contracting strategy, by including commodity price pass-through clauses.
Debt restructuring needs to succeed to avoid delisting
SAPE’s auditors expressed material uncertainty in relation to its FY22 financial accounts
and hence, SAPE was classified as a PN17 company under Bursa Malaysia’s rules
because as at 30 Apr 2022, SAPE’s shareholders’ equity of RM157m remained below the
critical threshold of RM5.4bn, being 50% of its paid-up share capital. Even if the material
uncertainty tag is lifted, SAPE will still need to have at least RM40m in shareholders
equity, which is just a tad lower than SAPE’s current position of RM157m in relation to
the size of its potential annual losses; hence the success of SAPE’s debt restructuring is
critical to avoid a delisting. Upside risks include SAPE securing new sources of equity,
and successful debt-to-equity swap exercises.