Investment Highlights

• We maintain our SELL call on Sapura Energy (Sapura) with an unchanged fair value of RM0.05/share, pegged to 0.2x to the group’s FY22F NTA as the group could still experience potential losses and asset impairments in the upcoming quarters amid revenue deferrals.
• According to The Edge CEO Morning Brief, Sapura together with its joint venture partner Seadrill are under investigation by Brazilian and Dutch authorities as part of a corruption probe into Petrobras’ award of 3 contracts to provide pipe-laying support vessels (PLSV) worth US$2.7bil, which were the signed by joint venture partners back in 2011.
• The online business publication reported that police executed dozens of search warrants on Wednesday as part of Brazil's famed “Car Wash” corruption investigation which has extended to an increasing number of international firms such as SBM Offshore, Maersk, Glencore and Vitol since 2014.
• Federal prosecutors in Brazil have undertaken 25 searches concentrated in Rio de Janeiro and Sao Paulo while Dutch police had also carried out a parallel investigation into the matter.
• Prosecutors described an alleged scheme in which Sapura allegedly paid bribes worth 1.5% of the contracts awarded by Petrobras with some of that money being channelled back to 2 "high-ranking" Sapura Energy executives in Malaysia. This accounts for an estimated RM166mil – 57% of Sapura’s FY21F loss.
• We estimate that the Sapura/Seadrill JV contributed 1HFY21 pretax profit of RM123mil (US$30mil) vs. group pretax profit of RM90mil, which includes contract adjustments and variation orders amounting to RM82mil, with all 6 PLSVs currently being utilised.
• The firm charters for the Petrobras contracts for the first 3 PLSVs, delivered in 2014–2015, have been completed while the second charter has a remaining order book of RM3.8bil. The PLSV Sapura Esmeralda is currently deployed on a short-term contract until April 2021 for Eni’s Amoco project off Mexico while we understand that Sapura Diamante and Topazio are on shortterm charters in the Campos Basin, off Brazil.
• While the second charter will still continue to be undertaken by the JV partners, there is a likelihood of substantive penalties if the authorities are able to prove the corruption cases.
• Meanwhile, Sapura’s founder and current president/CEO Tan Sri Shahril Shamsuddin has announced plans of retiring on 22 March 2021 upon reaching 60 years old. During a 6-month interim period from 1 October 2020, Datuk Mohd Anuar Taib, who is Sapura’s current independent and non-executive director, will be appointed as chief operating officer and CEO designate.
• Amid these worrisome legal issues, the group’s huge debt of RM10bil still needs to be refinanced with 14 banks by December 2020, which could mean additional equity-raising exercise in the pipeline that will translate to massive dilution given the current low share price.
• Even though Sapura registered an improvement in 1HFY21 results, we remain cautious of any potential cost provisions and asset impairments by 4QFY21 given that Petronas has registered a 1HFY20 loss of RM18bil, together with other oil majors.
• Additionally, Sapura's 2QFY21 outstanding order book decreased 5% QoQ to RM13.3bil (2.8x FY21F revenues) as the recent new wins of RM840mil were insufficient to offset the 2QFY21 depletion of RM1.2bil. Even though the group is bidding for RM29.4bil of new jobs with an additional prospective projects worth RM63bil, the order book could still decline over the next 2 quarters as clients are likely to postpone the awards until next year if the current gloomy offshore outlook persists.
• Given the corruption investigation amid prospects of further losses in the coming quarters, the stock currently trades at a low 0.2x PBV.

Source: AmInvest Research - 24 Sept 2020