Investment Highlights

• We upgrade our call on Sapura Energy (Sapura) to BUY from HOLD with a higher fair value of RM0.50/share (from an earlier RM0.30/share), based on a lower 30% discount to our estimated diluted book value of RM0.72/share, following the completion of its RM4bil rights issue.

• Our earlier concerns on the 18.5% undersubscription or 1.8bil ordinary shares out of the RM3bil rights shares issued at RM0.30/share on a 5-for-3 basis have been alleviated as the underwriters Maybank Investment Bank, CIMB Investment Bank and RHB Investment Bank have completely disposed of the shares without causing any significant price swings.

• Additionally, we have become more confident of Sapura’s improving earnings prospects which 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 are still likely from Sapura's current tender book of US$8.5bil with prospective bids of US$14.3bil.

• These are 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.

• In January this year, Sapura has secured 3 rig drilling charters and 2 offshore jobs worth RM760mil that include carrying out the engineering, procurement, construction and commissioning works related to relocating and tying in Petronas floating LNG Satu from the Kanowit field to the Kebabangan cluster off Sabah, with completion expected in 3Q2020.

• The group’s yard’s utilization is expected to surge 5.8x from 5K tonnes in 2018 to 29K tonnes in 2019 and subsequently accelerate further by 28% to 37K tonnes in 2020, driven by the progress completions of the Pegaga and ONGC’s KG-DWN- 98/2 central processing platform projects, coupled with the 3 wellhead platforms for the Sapura-OMV’s Gorek, Bakong and Larak wellhead platforms. Our only concern is the group’s drilling division as its rig utilization rate of below 50% currently will continue to drag the group’s overall improving earnings prospects.

• 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.

• The stock currently trades at an unjustified ex-PBV of 0.5x for a company poised on an earnings inflection upturn.

Source: AmInvest Research - 15 Mar 2019