KUALA LUMPUR (June 28): Analysts have maintained their "sell" recommendation on Sapura Energy Bhd as the financially troubled group's debt restructuring plan to turn around its operations remains uncertain despite returning to profitability.
Sapura Energy opened at five sen on Tuesday (June 28), up 11.11% or half a sen, driven by the announcement that the Practice Note 17 (PN17) company returned to profit for the first quarter ended April 30, 2022 (1QFY23) from a net loss for the previous year.
The most active stock across the local bourse then jumped 22.22% or one sen to 5.5 sen at the time of writing. It has rebounded 37.5% from a low of four sen last Thursday.
At 5.5 sen, Sapura Energy was valued at RM790.96 million, with some 80.89 million shares traded so far in the day, higher than the 200-day average of 56.89 million.
However, the counter has lost 44% in the past month and 61.54% over the past year.
Bloomberg data shows that analysts have four “sell”, one “underperform”, one “reduce”, one “neutral” and one “buy” calls on the stock, with target prices (TPs) ranging from a low of half a sen to a high of 12 sen.
Sapura Energy recorded a net profit of RM91.93 million for 1QFY23, compared to a net loss of RM97.07 million for 1QFY22, on the back of foreign exchange gains resulting from appreciation of the US dollar against the ringgit. However, the company's revenue decreased by 39.75% to RM886.08 million from RM1.47 billion due to lower project activity in the engineering and procurement (E&C) division.
For the preceding quarter (4QFY22), the company posted its biggest-ever net loss of RM6.78 billion.
Analysts covering the stock said Sapura Energy's 1QFY23 earnings were in line with their expectations, but as the oil and gas services provider's strategies to turn around its operations remain uncertain, they are maintaining their “sell” recommendation on the stock.
Hong Leong Investment Bank (HLIB) Research maintained its "sell" recommendation with an unchanged TP of one sen, based on 0.5 times FY22 price-to-book ratio. “We think that Sapura Energy will need more time and efforts to turn its operations into profitability, which we do not foresee happening anytime soon. We are concerned over its operational liquidity from difficulties to obtain funding and its ability to win future jobs due to its balance sheet weakness,” said the research house in a note.
As at end-April 2022, Sapura Energy’s order book stood at RM8.3 billion, with RM23 billion of bids in progress. HLIB expects the company’s current hurdles and uncertainties to continue in FY23.
The group’s net debt continued to deteriorate, which ballooned to RM10.2 billion as of 1QFY23 from RM9.9 billion at end-FY22, it noted.
“We think that it will be an uphill task for Sapura Energy to turn around its operations in the near to medium term due to: heightened cost overruns in its projects; liquidity issues from difficulties to obtain funding due to its balance sheet distress as it is now officially a PN17 company; job delivery and execution risks as Sapura Energy has yet to display a satisfactory track record in recent years; and inability to win jobs due to its challenged balance sheet,” HLIB explained.
CGS-CIMB Research said the success of the company’s debt restructuring is critical to avoid a delisting. The research house kept its "reduce" rating of the stock, with an unchanged TP of half a sen.
The company’s auditors expressed material uncertainty in relation to its FY22 financial accounts and hence, it was classified as a PN17 company under Bursa Malaysia’s rules.
Sapura Energy shareholders’ equity of RM157 million remained below the critical threshold of RM5.4 billion, being 50% of its paid-up share capital, as at end-April 2022.
“Even if the material uncertainty tag is lifted, Sapura Energy will still need to have at least RM40 million in shareholders equity, which is just a tad lower than Sapura Energy's current position of RM157 million in relation to the size of its potential annual losses, hence the success of the group’s debt restructuring is critical to avoid a delisting,” said CGS-CIMB.
Kenanga Research maintained its "underperform" call with an unchanged TP of half a sen, pegged at 0.5 times the group’s 1QFY23 net assets. “Post-results, we lowered our FY23/24 loss assumptions by 18%/22% after adjusting for better E&C contributions."
“It is continuing its restructuring efforts in order to remain afloat, which includes renegotiation of its legacy contracts and with lenders over its debts as well as implementation of a divestment plan.
“On a more positive note, the group recently managed a successful drawdown of a RM300 million working capital loan, securitised against the proceeds of disposal of its Sapura 3000 asset, which is expected to be completed in July. This is expected to help ease its liquidity issues at least for the next couple of months,” added Kenanga.