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.

• Sapura’s fair value is unchanged as we maintain our FY19F earnings given that the group’s 9MFY19 loss of RM293mil was within our expectations, albeit worse than consensus loss of RM222mil. Excluding unrealized forex gains of RM96mil, Sapura’s core loss of RM389mil is well within our FY19F loss of RM547mil, with the group expected to suffer a wider 4QFY19 loss due to seasonally lower offshore activities during the monsoon season.

• However, given that Sapura has secured a US$353mil (RM1.5bil) contract to build Oil and Natural Gas Corporation Limited’s Offshore Process Platform (central processing platform & living quarters) project for the KG-DWN-98/2 NELP block as indicated in our past reports, the group’s new FY19F contract wins have surged by 21% to RM8.5bil to date, well ahead of our order book intake assumption of RM6bil.

• With more contracts yet to be announced soon, we have raised our FY19F-FY21F new order book assumptions by 25%–50% to RM9bil–RM10bil, which raise FY20F-FY21F earnings by 16%– 42% in view of the engineering, procurement, construction and installation (EPCI) profit recognition cycle.

• The new jobs increase Sapura’s outstanding order book by 10% QoQ to RM16.9bil — 2.8x revised FY20F revenues. As the group was recently selected as one of Saudi Aramco’s 4 new long-term agreement programme contractors for a 6-year firm period (excluding 2 optional extensions of 3 years), we expect substantive expansions from its current tender book of US$8.5bil and prospective bids of US$14.3bil.

• Sapura’s 3QFY19 loss narrowed by 75% QoQ to RM31mil mainly higher utilization of its construction vessels which drove the engineering & construction (E&C) revenue by 23% QoQ and cost optimization in the drilling segment which cut its losses by 80% to only RM12mil. This was further improved by the exploration and production division’s (E&P) 33% QoQ pre-tax profit increase to RM37mil, underpinned by the US$2/barrel increase in crude oil price to US$79/barrel amid a flat output of 1.1mil barrels.

• Earnings prospects for the E&C segment is improving amid better vessel utilization while the fabrication yard utilization, currently at 10% in 3QFY19, is expected to reach 40% in 4QFY19 and touch 80% towards 2HFY20F. While the drilling segment’s losses have ameliorated, market conditions still need to significantly improve as Sapura needs to charter out 10 of 16 rigs to achieve breakeven vs. 7 in 3QFY19 and 6 in 2QFY19.

• The stock currently trades at a low ex-rights PBV of 0.5x currently with a pipeline of multiple new contract wins in the near horizon.

Source: AmInvest Research - 7 Dec 2018