Investment Highlights

• We downgrade our call on Sapura Energy (Sapura) to HOLD from BUY with a lower fair value of RM0.30/share (from an earlier RM0.55/share), based on a steeper 60% discount (from an earlier 25%) to our estimated diluted book value of RM0.72/share, following the RM4bil rights issue, which went ex on 27 Dec 2018.

• Even though our earnings forecasts are unchanged on positive order book prospects, the overhang of underwritten shares from the under-subscribed rights portion will limit any potential upside over the medium term.

• Recall that the RM3bil rights shares were issued at RM0.30/share on a 5-for-3 basis, with one free warrant given for every 10 rights shares subscribed. However, Sapura has received only 8.1bil valid acceptances for its rights shares from the 10bil rights shares available for subscription.

• The under-subscription rate of 18.5% means that 1.8bil ordinary shares are now held by the underwriters Maybank Investment Bank, CIMB Investment Bank and RHB Investment Bank. Given Sapura’s average daily trading volume of 116mil over the past 1 year, we expect that the underwriters may need a few months to dispose of those shares upon their listing on 29 this month.

• As for the RM1bil RCPS-I preference shares issued at 41 sen each on a 2 RCPS-i-for-5 shares ratio, the group received valid acceptances of 2.4bil for the 2.1bil available for subscription, translating to an oversubscription rate of 1.2%.

• Together with a proposed 50% equity stake in Sapura Upstream to Austria-based OMV Aktiengesellschaft (OMV) for an enterprise value of US$1.6bil, 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.

• With the emergence of Permodalan Nasional as the single largest strategic shareholder with a 40% stake vs. Tan Sri Shahril Shamsuddin’s indirect 16.3% stake, we expect greater corporate governance oversight in the group’s operations.

• We highlight that Sapura’s longer term prospects remain strong given its massive new orders worth RM9.3bil for FY19 to date, which translate to 2.3x the RM2.8bil jobs clinched in FY18. With an outstanding order book of RM17.7bil — 3x FY20F revenues, prospects continue to be underpinned by huge new offshore rollouts globally.

• Selected as one of Saudi Aramco's 4 new long-term agreement programme contractors late last year, substantive order book expansions are likely from Sapura's current tender book of US$8.5bil and prospective bids of US$14.3bil.

• Notwithstanding its improving earnings outlook, the stock currently trades at half its ex-PBV of 0.4x due to medium-term concerns over the rights share overhang.

Source: AmInvest Research - 24 Jan 2019