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. This implies a 24% discount to our ex-SOP.

• PNB is set to become Sapura’s largest shareholder with an equity stake of up to 40% (from 12% currently) following the completion of the group’s proposed renounceable rights issue of up RM4bil.

• Recall this involves rights shares priced at RM0.30/share on a 5- for-3 basis with 1 free warrant for every 10 rights shares subscribed together with new Islamic redeemable convertible preference shares (RCPS) at RM0.41/RCPS to be allocated on a ratio of 2 RCPS-to-5 shares.

• As this exceeds the mandatory takeover threshold of 33%, PNB is applying for an exemption to undertake a general offer for the remaining shares.

• PNB has given an undertaking letter to Sapura to subscribe for its rights entitlement and the excess shares and warrants not taken up by the other shareholders, up to an equity stake of 40% in the group. This could mean that PNB alone will be taking up to 57% of the rights share offering.

• Additionally, PNB will subscribe for the entire RM1bil RCPS offering. Assuming full conversion at the end of the RCPS’ 5-year maturity, PNB’s stake could rise further to 48%. However, we understand that Sapura intends to fully redeem the RCPS before its maturity.

• President and CEO Tan Sri Shahril Shamsuddin via Sapura Technology Sdn Bhd has also given an undertaking to subscribe for a miniumum rights entitlement of RM300mil. Maybank Investment Bank and Credit Suisse have given an undertaking to subscribe for the remaining RM1bil rights shares not subscribed by PNB or Shahril, which means that the proposed rights exercise is a “done deal”.

• It is likely that PNB will increase its board representation in Sapura from only 1 currently. However, Shahril will remain in his current position as the entrepreneur/founder who has built Sapura into a regional oil and gas operator and service provider.

• We are positive on this development as the entry of PNB will provide further corporate governance and oversight for the group. Recall that there were complaints at the July AGM on Shahril’s RM72mil compensation.

• Additionally, the rights combined with the divestment of half of Sapura’s upstream division to OMV Aktiengesellschaft for an enterprise value of US$1.6bil will halve Sapura's FY19F net debt to RM8bil while net gearing drops from 1.6x to 0.8x. The lower gearing level will also free up working capital to support the rising momentum of EPCIC jobs underpinned by the RM5.3bil orders secured this year, reaching 82% of our FY19F assumption.

• The stock currently trades at a low ex-PBV of 0.6x currently vs. 0.8x for Bumi Armada.

Source: AmInvest Research - 26 Sept 2018