Investment Highlights

• We maintain our BUY call on Sapura Energy (Sapura) with unchanged forecasts and fair value of RM0.55/share, based on a 25% discount to our estimated diluted book value of RM0.72/share, assuming completion of the proposed rights issue of up to RM4bil.

• We attended the analyst briefing last Friday following Sapura’s signing of the subscription and shareholders’ agreements to dispose of the 50% equity stake in Sapura Upstream to Austriabased OMV Aktiengesellschaft (OMV) for an enterprise value of US$1.6bil. These are the salients points:
• Initially 91% or US$890mil of the US$975mil cash proceeds will be paid after the completion of the sale in 1QFY20 with US$55mil likely secured over the next 3-4 years after reaching final investment decision for the group’s Block 30 in the Sureste basin off Mexico and remaining US$30mil for the Brent oil price differential between 2019 and 2022.
• Including dividends of US$500mil to date, the sale pegs Sapura Upstream’s valuation at 2.3x of the US$896mil cost paid to Newfield back in February 2014. Management’s estimate of the exceptional gain of US$649m (RM2.7bil), which translates to 35x of FY20F net profit, excludes the remaining proceeds of US$85mil which will be paid over the next 3 years and almost equal to FY21F earnings.

• Both the special purpose vehicle Sapura OMV and OMV will focus on their core geographical regions as they operate in largely exclusive territories, with the exception of Australia and New Zealand. Sapura and OMV will individually have 3 board members on Sapura OMV with Sapura holding the chairman and CEO roles while OMV occupies the deputy chairman and CFO positions.

• Together with the group’s RM4bil rights issue, we estimate that Sapura’s net profit will surge 2.2x for FY20F and 46% for FY21F from the substantive cuts in interest costs, partly offset by the upstream earnings deconsolidation. Additionally, this will cut the group’s FY20F net gearing from 1.7x to a comfortable 0.5x, lower than our earlier estimate of 0.7x due to the book value boost from the exceptional disposal gain.

• Assuming Sapura sells a 50% stake in its drilling assets based on its book value of RM6.4bil as at 31 Jan 2018, we estimate that the gearing could drop even further to 0.3x while improving earnings to 2.3x for FY20F and 60% for FY21F, which will support the rising momentum of EPCIC jobs underpinned by the RM5.3bil orders already secured this year, reaching 82% of our FY19F assumption.

• Besides an improved balance sheet, we remain positive on this mutually beneficial strategic partnership which expands Sapura’s portfolio and facilitate synergies in the upstream value chain through the sharing of technology, development of Sapura’s local talent and risk mitigation in E&P activities while opening up new market opportunities for its engineering & construction services in OMV’s offshore activities globally.

• The stock currently trades at a low ex-rights PBV of 0.5x currently vs. its historical 3-year of over 1x.

Source: AmInvest Research - 12 Nov 2018