Investment Highlights

• We maintain our HOLD recommendation on Sapura Energy (Sapura) with unchanged forecasts and fair value of RM1.72, based on a 20% discount to book value.

• Sapura will be taking over the remaining 50% equity stake in its self-propelled, dynamically-positioned heavy lift derrick and pipelay combination vessel Sapura3000 via a dissolution of the SapuraAcergy joint venture with Subsea 7 S.A.

• SapuraAcergy, established since 2006, contributed RM8mil in associate pre-tax profit to Sapura in 1HFY18. We understand that Sapura's full ownership of Sapura3000 will be exchanged at below book valuation, of which management has not revealed at this juncture due to confidentiality.

• On the other hand, Subsea 7, which registered a profit of US$6mil from SapuraAcergy in 2016, expects to record a US$10mil loss in 3Q2017 on dissolution of the joint venture, in which its book value as at 31 Dec 2016 was US$129mil. Subsea 7 expects to receive US$100mil in cash dividends from the sale.

• Sapura3000 has an established track record in executing heavy-lift, pipelay and decommissioning work for shallow and deepwater projects globally, including projects in Mexico, Japan, China, Australia and the Southeast Asian region. Its notable jobs were Malaysia's first two deepwater development projects for the Kikeh and Gumusut-Kakap fields.

• Assuming a transaction price of US$100mil for the remaining 50% SapuraAcergy equity stake, which translates to a high acquisition PE of 26x, annualized FY18F earnings and interest cost of 4%, we expect the group's FY18F net gearing to be minimally raised at 1.1x while the FY18F-FY19F earnings is likely to be marginal. Hence, we are largely neutral on this development.

• In 2QFY18, 6 rigs were in operation compared to 10 stacked rigs, translating to a utilisation rate of only 40% in a fleet of 15. As the tender rig T-12 will be dropping out of Chevron’s contract next quarter, the group’s rig utilisation will drop further to 33%. This portends to weaker bottom lines from 3QFY18 onwards vs. a RM85mil drilling loss in 2QFY18.

• In the absence of significant new order wins, the group's order book has decreased 11% QoQ to RM15.1bil in 2QFY18. While the group is hopeful for further wins with tender prospects worth US$8.2bil, the pace of awards is still slow currently.

• The stock currently trades at a pricey FY19F PE of 40x but this is cushioned by its 31% discount to book value of RM2.15/share.

Source: AmInvest Research - 19 Oct 2017