Investment Highlights

• We maintain our BUY call on Sapura Energy (Sapura) with an unchanged fair value of RM0.55/share, based on a 25% discount to our estimated diluted book value of RM0.73/share, assuming ex-proposed rights issue of up to RM4bil.

• We are positive on Sapura's head of agreement (HOA) to sell half of its wholly-owned upstream division to OMV Aktiengesellschaft (AG), even though the enterprise value of $1.6b (RM6.6bil) is 10% below our RM7.4bil estimate in our earlier SOP of RM0.87/share. This reduces our SOP by 17% to RM0.72/share, which is still at a 30% premium to our unchanged fair value.

• While the group’s upstream valuation is below our expectations, we note a direct sale will save on substantive listing expenses, as its proposed listing process will be suspended pending a definitive agreement from their exclusive negotiations. The HOA expresses the intentions of the parties to form a strategic partnership to expand their portfolios and future business activities while reaping synergies in the service value chain.

• OMV AG is one of Austria’s largest listed integrated O&G players with a far larger market capital of EUR14.7bil (RM71bil) - 34x Sapura Energy's RM2bil. In upstream, OMV AG has a strong base in Romania and Austria and an international portfolio in the North Sea, the Middle East & Africa and Russia (See Exhibit 7). OMV's 2017 daily production of 348k barrels of oil equivalent (boe) translates to 32x of Sapura's 11k boe currently.

• The proposed strategic partnership will comprise Sapura's entire portfolio of commercially viable gas assets, including offshore Sarawak, New Zealand, Gulf of Mexico and Australia. Additionally, OMV’s existing global core regions offer new synergistic opportunities for Sapura's upstream capabilities in EPCIC and drilling services.

• We estimate that the RM3.3bil cash proceeds together with the recently proposed rights of up to RM4b will easily meet its short term debt obligations of RM3.9bil by February next year. Assuming the rights are fully subscribed, Sapura's FY19F net debt could halve to RM8bil while net gearing drop from 1.6x to 0.8x. The lower gearing level will also free up working capital to support the rising momentum of EPCIC jobs with a substantive surge in new contract awards expected to be announced soon in addition to the RM4.5bil orders already secured in 1QFY19.

• While our forecasts are unchanged for now pending a formal agreement, we estimate the sale to generate a one-off profit of RM1bil (11x of FY20F net profit) based on the upstream asset's FY18 BV of RM4.7bil as at 31 Jan 2018. As Sapura has not commenced gas production for its SK408 fields, the sale has already monetized its upfront valuation, potentially doubling the group’s FY20F earnings and 19% increase for FY21F net profit, with the lower interest costs partly offset by the E&P minority charge.

• The stock trades at a low ex-PBV of 0.5x currently vs. 0.7x for Bumi Armada.

Source: AmInvest Research - 13 Sept 2018