Investment Highlights

• We maintain our BUY recommendation on Sapura Energy (Sapura) given the attractive upside potential to our unchanged fair value of RM1.00, based on a 50% discount to FY19F book value.

• Our forecasts are maintained as we have already assumed RM7bil of new orders for FY19F even though Sapura has secured the engineering, procurement, construction, installation and commissioning (EPCIC) contract for the Pegaga integrated central gas processing platform (CPP) facility in Block SK320, in the offshore waters of Sarawak.

• The CPP, designed to handle 550 million cubic feet of gas per day plus condensate, is in a production field operated by Mubadala Petroleum which has a 55% interest with Petronas Carigali 25% and Shell 20%.

• As the works are expected to be completed by the third quarter of 2021, we do not expect any significant earnings contribution from this contract in FY19F.

• While the announcement did not reveal the contract value, we understand that the whole EPCIC scope could reach RM2bil, which will wholly accrue to Sapura’s bottomline, as there is no joint venture with an engineering company similar to MMHETechnip’s model.

• Including this new contract plus the RM905mil contracts which Sapura announced last month, the group has achieved 41% of our FY19F order book assumption.

• Besides this contract, we understand that there may be another CPP project in India and 3 more wellhead platform construction contracts for the SK408 field in the pipeline.

• We expect the operating losses and impairment charges in the group’s 4QFY18 results, which will be announced on 28 March.

• However, the impairments are unlikely to lead to a reduction of over 20% of the group’s book value, as Sapura’s RM8bil of intangible assets are unlikely to be substantively devalued given their ongoing business prospects.

• The group’s order book still translates to 2.2x FY19F revenue with management is hopeful of further wins from tender prospects worth up to US$9.5bil. Global offshore order flows are starting to pick up against the backdrop of more active onshore rollouts, given that stabilising crude oil prices currently above the US$60/barrel threshold support operators’ investment decisions.

• We expect the group’s proposed plans to list its profitable exploration and production assets to reignite excitement and re-accentuate Sapura’s asset value, which is currently trading at a huge undeserved discount of 0.25x to book valuation vs. 0.9x for Bumi Armada and 0.5x for MMHE.

Source: AmInvest Research - 22 Mar 2018