• Maintain SELL and MYR0.02 TP, 60% downside. Sapura Energy’s 9MFY24 (Jan) results missed estimates, largely dragged by a higher cost base for key segments. We remain cautious on its engineering & construction (E&C) unit’s profitability. Although the receipt of the approvalin-principle from financiers is an important milestone in its restructuring plan, we keep our SELL call, as holistic debt and equity restructuring – highly dilutive, in our view – is inevitable for SAPE to get out of the woods.

• Below expectations. 9MFY24 core loss of MYR391m was below expectations at 147% and 152% of our and Street’s full-year forecasted losses. The negative deviation was mainly due to its numbers being dragged by weaker-than-expected margins. No dividend was declared, as expected.

• Results review. SAPE recorded a MYR228m core loss in 3QFY24 after stripping off MYR271m in FX gains and MYR12m in PPE impairment losses. This was the worst performing quarter in the past 18 months. The widening losses (QoQ and YoY) were largely due to weaker E&C, offshore & marine (O&M), and drilling segments’ contributions as a result of project delays and higher direct and project costs. This was partially offset by stronger contribution from the energy business, as evidenced by better JV and associate contributions (+7% QoQ, +38% YoY). 9MFY24 losses widened by 35% YoY to MYR391m on the abovementioned reasons.

• Outlook. As there was no contract win announced, its orderbook value shrank by 14% QoQ to MYR5.4bn as of 3QFY24. Orderbook replenishment remains one of SAPE’s biggest challenges, with limited access to bank guarantees and working capital. The drilling segment is expected to deliver a stable performance, as 10 out of 11 rigs are under charter contracts. SAPE has received confirmation from the Corporate Debt Restructuring Committee (CDRC) that at least 75% of the financiers of its MYR10.3bn in multi-currency financing facilities (MCF Financiers) have provided the requisite approval-in-principle for a proposed debt restructuring scheme that will facilitate court-convened meetings with all its creditors. In view of its stretched cash flow, SAPE will continue pursuing contracts with relatively lower working capital requirements, as well as asset monetisation.

• We raise FY24-26F losses by 2-75% on weaker EBITDA margins for the E&C and drilling segments. Our SOP-based TP is largely unchanged at MYR0.02, and includes a 10% ESG discount. Note that we have assumed 20% of total debt was converted to equity, based on a conversion price of MYR0.10/share. Our share base is enlarged by 21.4bn or 1.2x. Upside risks: Better-than-expected project execution, stronger-than-expected contract flow.

Source: RHB Securities Research - 14 Dec 2023