Investment Highlights

• We maintain our HOLD call on Sapura Energy (Sapura) with unchanged forecasts and fair value of RM0.30/share, based on a 60% discount to our estimated diluted book value of RM0.72/share, following the completion of its RM4bil rights issue.

• Upstream reported that Petronas is expected to delay or even abort its Kasawari project on Block SK 316 off Sarawak due to the Sarawak State attempting to extract additional financial benefits from the Federal government.

• In 2Q2018, Petronas invited Malaysia Marine & Heavy Engineering Holdings (MMHE) and Sapura to bid for the engineering, procurement, construction, installation and commissioning contract for Kasawari’s Central Processing Platform.

• Consultant Wood Mackenzie had earlier expected that Petronas could reach final investment decision on Kasawari in mid-2020 with production commencing in mid-2025.

• With an estimated 3 trillion cubic feet of recoverable gas reserves albeit with high carbon dioxide content between 30% to 40%, the Kasawari field is located in an environmentallysensitive marine area.

• The SK 316 block also contains the producing NC3 field that supplies feedstock gas to Train 9 at Petronas’ LNG complex at Bintulu and includes over 5 other gas discoveries which is under development and likely to start-up in 2022.

• Malaysia’s near-term oil and gas order rollouts are likely to be unexciting given the current volatility oil price trajectory amid competition in the Sabah and Sarawak states for higher financial compensation for production fields within their territories.

• Hence, brighter order prospects currently stems overseas, principally in the Middle-East, Brazil, Gulf of Mexico and West Africa. Selected as one of Saudi Aramco's 4 new long-term agreement programme contractors late last year, substantive order book expansions still likely from Sapura's current tender book of US$8.5bil and prospective bids of US$14.3bil.

• This is highlighted in Sapura’s new orders worth RM9.3bil for FY19 to date, which translate to 2.3x the RM2.8bil jobs clinched in FY18 and an outstanding order book of RM17.7bil - 3x FY20F revenues.

• Together with the completion of the sale of a 50% equity stake in Sapura Upstream to Austria-based OMV Aktiengesellschaft (OMV) for an enterprise value of US$1.6bil, we expect Sapura’s net profit to surge by 2.2x for FY20F and 46% for FY21F from 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.

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

Source: AmInvest Research - 7 Feb 2019