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.

• We have fine-tuned FY20F-FY21F earnings given the group’s outstanding order book of RM16.9bil (3.6x FY19F revenues) while doubling our FY19F loss on decreased recognition of engineering & construction (E&C) billings together with lower asset utilisation rates as the bulk of the recent job wins is still at an early stage of the engineering, procurement, construction, installation and commissioning (EPCIC) cycle.

• Our lowered forecasts stem from Sapura’s 1HFY19 loss of RM262mil coming in below expectations, already worse than our earlier FY19F loss of RM246mil and consensus’ RM168mil.

• While management is guiding for improvement in the E&P segment in 2HFY19, we expect the monsoon season in Malaysia and the Caspian winter towards the end of the year to widen losses in 4QFY19F.

• Sapura’s 2QFY19 loss decreased by 7% QoQ to RM126mil mainly from the tripling of the exploration and production (E&P) pre-tax profit to RM28mil, driven by the US$7/barrel increase in average lifting crude oil price to US$77/barrel and a 4% increase in output to 1.1mil barrels of oil equivalent.

• This was largely offset by the reversion to a 2QFY19 E&C loss of RM21mil as the division’s vessel utilisation rate fell to 33% in 2QFY19 from 50% in 1QFY19. The E&C revenue, however, rose 17% QoQ from the initial engineering and procurement stages for the Pegaga central processing platform, wellhead platforms for SK408 and Hess Phase 2 together with other Indian works.

• The drilling division’s 2QFY19 loss reduced by 15% to RM58mil as rig utilisation rose to 5.8 rigs from 4.4 rigs, which drove the segment’s revenues up by 38%. Management indicated that the group’s working rigs could remain around 6 vs. 10 unutilised units in 2HFY19 amid prospects of 10-20 charters in the pipeline.

• Separately, we estimate that the proposed rights issue of RM4bil combined with the divestment of half of Sapura’s upstream division to its strategic partner, OMV Aktiengesellschaft at an enterprise value of US$1.6bil will halve Sapura's FY19F net debt to RM8bil while net gearing drop from 1.6x to 0.8x. The group is also looking at a similar partnership structure for Sapura’s drilling division, which could lead to lower net gearing levels.

• Sapura’s improved balance sheet frees up working capital to support the rising momentum of EPCIC jobs underpinned by the RM5.3bil orders already secured this year, reaching 82% of our FY19F assumption, with additional intake expected from tenders valued at US$7.4bil (RM31bil) and potential prospects worth US$10.2bil (RM42bil). The stock currently trades at a low ex-PBV of 0.6x currently vs. 0.8x for Bumi Armada.

Source: AmInvest Research - 1 Oct 2018