Lower core loss but Sapura’s balance sheet remains over-stretched

IN ITS ultimate assessment of Sapura Energy Bhd, Hong Leong IB (HLIB) Research remains adamant that it will be an uphill task for the integrated global oil & gas (O&G) outfit to turnaround its operations even as the group has narrowed its core net loss to -RM77 mil in its 2Q FY1/2023 from a gargantuan RM1.46 bil a year ago.

Ceasing its coverage on Sapura with a previous “sell” rating and a target price of 1 sen, the research house based the hardship on the group’s:

  • Heightened cost overruns in its projects;
  • Liquidity issues from difficulties to obtain funding due to its stretched balance sheet as it is now officially a Practice Note 17 (PN17) company;
  • Job delivery and execution risks as Sapura has yet to display a satisfactory track record in recent years; and
  • Inability to win jobs due to its challenged balance sheet.

“As of end-July 2022, Sapura’s order book stood at RM7.7 bil. We continue expect current hurdles and uncertainties to continue in FY1/2023. The group’s net debt level continued to deteriorate to RM10.3 bil as of end-2Q FY1/2023 from RM9.9 bil as of end-FY1/2022,” observed analyst Jeremie Yap in a results review.

“At a net gearing of 54.3 times as of end-2Q FY1/2023, it will be an uphill task for Sapura to turnaround its operations in the near-to-medium term.”

By the way, Sapura’s year-on-year (yoy) lower core net loss for its 2Q FY1/2023 was attributed to multiple factors, namely (i) higher revenue recognised from all of its business segments; (ii) lower provision for foreseeable losses, and (iii) lower project costs incurred.

“On a year-to-date basis (1H FY1/2023), Sapura registered a lower core net loss of -RM280 mil due to (i) lower share of losses from its joint venture (JV) and associates by (ii) lower provision for foreseeable losses; and (iii) lower project costs incurred,” noted HLIB Research.

With regard to its ceasing of coverage on Sapura, HLIB Research attributed its decision to (i) re-allocation of internal resources; (ii) the group’s stretched and deteriorating balance sheet; and (iii) lack of investor interest on the company.

“Our previous ‘sell’ recommendation and 1 sen target price (based on 0.5 times FY1/2022 price-to-book [P/B] value) should no longer be used as a reference going forward,” added the research house.

At 10.42am, Sapura was unchanged at 4 sen with 4.51 million shares traded, thus valuing the company at RM639 mil. – Sept 27, 2022

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