While securing the RM1.85bil job wins (15% of its order backlog) is vital to its replenishment exercise, Sapura Energy still needs to execute these works well to eliminate cost-overrun risk. PETALING JAYA: Analysts have raised concerns on Sapura Energy Bhd’s earnings sustainability and “highly” geared balance sheet despite its recent contract wins worth billions of ringgit. Yesterday, Sapura announced that it had won multiple contracts including six new engineering and construction (E&C) jobs and one drilling contract extension totalling RM1.85bil. Maybank Investment Bank Research pointed out that Sapura Energy would need to refinance and restructure its RM10bil debt and lower its cost structure as it will override any growth prospect. “While securing the RM1.85bil job wins (15% of its order backlog) is vital to its replenishment exercise, Sapura Energy still needs to execute these works well to eliminate cost-overrun risk. “That said, its highly geared balance sheet remains an overriding concern. “For that, we continue to see better values elsewhere in the oil and gas (O&G) space, ” it said in a report yesterday. Maybank IB said Sapura Energy needs to secure an additional RM10bil worth of new orders to sustain its order backlog, which stood at RM12.5bil as at October 2020 and ensure that jobs are delivered on time and on a budget to mitigate cost-overrun risk. PublicInvestment Bank Research expects Sapura Energy to secure more contracts this year on the back of its RM37bil tender book. However, it raised concern about the company’s efficiency of project execution and profit margins. “Financial performance year-to-date in financial year 2021 (FY21) is undoubtedly better compared to FY20, though we reckon this is mainly due to a sudden increase in spot orders and recognition of lumpy variation orders, “We see it as unsustainable, with profit margins expected to remain volatile, ” PublicInvest said. Both Maybank IB and PublicInvest have a “sell” call on Sapura Energy with a target price of six sen and 10 sen, respectively. On the contrary, MIDF Research has a “buy” call on Sapura Energy and anticipates better margins to accompany the latter’s recent contract wins, which will assist in lifting its earnings going forward. “We continue to view Sapura Energy’s future prospects positively, given that the operating environment worldwide has improved since April 2020, ” it said. “Also, we note that by managing to secure the CRPO 59 from Saudi Aramco, it might open the doors to more opportunities from the oil giant. “Furthermore, we believe that earnings will be lifted in FY22 in line with the gradual ramp-up in E&C project execution milestones in FY21 and a stable number of rigs in operation (about six to seven rigs per quarter), which will negate the impact of the compressed margins and competitive charter rates for its drilling segment, ” it added. However, the research house has maintained its forecast on Sapura’s FY21-FY22 earnings, given that the contract wins fall within its order-book replenishment assumption for the year of RM4.0bil. Kenanga Research said that Sapura Energy is reportedly to be the frontrunner for the local Jerun platform engineering, procurement, construction, installation and commissioning, potentially edging out close competition Malaysia Marine and Heavy Engineering Holdings Bhd. “The project is largely seen as a two-horse race between the two fabricators. “We expect finalisation of the job award in the coming months, with a contract value of potentially more than RM1bil, ’ it said. Nonetheless, despite the contract wins, Kenanga said it was “still insufficient to sustainably turn around the company into profitability for the time being. “The group’s net gearing still remains at a high of 1.1 times, with ESG also being a concern with the company”.
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