KUALA LUMPUR (Sept 27): The outlook for cash-strapped Sapura Energy Bhd is likely to remain challenging through the financial year ending Jan 31, 2023 (FY23) given the tough operating environment, according to analysts.
It will be an uphill task for the oil and gas service provider to turn around its operations in the near to medium term, amid heightened cost overruns in its projects, besides having difficulty raising funds due to a stretched balance sheet, as it is now officially a Practice Note (PN17) company.
Sapura Energy also faces job delivery and execution risks, as it has yet to display a satisfactory track record in recent years and is unable to secure jobs due to the strained balance sheet, said Hong Leong Investment Bank Bhd (HLIB).
The reallocation of internal resources, the stretched and deteriorating balance sheet, and lack of investor interest led HLIB to cease its coverage of Sapura Energy. “Our previous ‘sell' recommendation and target price (TP) of one sen (based on 0.5 times FY22 price-to-book ratio) for Sapura Energy should no longer be used as a reference going forward."
It is understood that Sapura Energy’s net debt level had continued to deteriorate to RM10.3 billion as at the end of the second quarter ended July 31, 2022 (2QFY23), from RM9.9 billion as at end-FY22.
“We continue to expect current hurdles and uncertainties to continue in FY23,” the research house wrote in a note on Tuesday (Sept 27).
KAF Equities Sdn Bhd, meanwhile, opined that Sapura Energy will face earnings headwinds in the second half of FY23 (2HFY23), and that the debt restructuring process will remain an overhang for its share price.
“Until its balance sheet situation is more certain, we opine that going concern risks are still present, and it would be challenging for the company to tap into the upstream industry recovery sufficiently without a buffer on its balance sheet.
“Hence, we believe the group’s turnaround is still distant and uncertain at this juncture, despite improvements in its business divisions in line with sector recoveries,” said KAF, which maintained its "sell" rating, with a TP of two sen.
Concurring with the same view, PublicInvest Research also said that the group’s prospects remain uncertain. “We gather that the exposure to legacy contracts will only reduce to 25% in 4QFY23."
As such, it said, project execution will remain challenging, especially in managing costs for legacy projects in the engineering and construction segment.
“Given the prevailing [and elevated] cost of material prices, some projects have also been deferred to next year,” said PublicInvest.
It foresees the group’s profit margins to remain volatile, though its top line will be supported by a relatively healthy outstanding order book of RM7.7 billion, and a bid book of approximately RM24.4 billion. “Our ‘neutral’ call and sum-of-parts derived TP of five sen are retained,” said PublicInvest.
Sapura Energy reported a lower net loss of RM2.59 million for 2QFY23, compared with RM1.52 billion for the same quarter last year.
This resulted in the oil and gas service provider posting a net profit of RM89.34 million for 1HFY23, versus a RM1.61 billion net loss a year earlier, due to progress in claims and settlements, coupled with higher rig utilisation and construction project completions.
Driven by the improved results, Sapura Energy saw its share price jump over 12% as at the noon break on Tuesday.
The stock settled 12.5% or half a sen higher at 4.5 sen, with a market capitalisation of RM719.06 million.
There are four "sell", one "neutral", one "hold", and one "buy" calls on Sapura Energy, Bloomberg data showed.