Investment Highlights

• Our BUY recommendation is maintained on Sapura Energy (Sapura) with unchanged forecasts and fair value of RM1.00/share, based on a 50% discount to FY19F book value.

• We maintain Sapura’s FY19F order replenishment assumption of RM7bil, which includes the expected award of Oil & Natural Gas Corporation’s (ONGC) pipeline installation contract worth around US$212mil (RM837mil). Including this contract would raise Sapura’s fresh job awards for FY19F to date by 30% to RM3.5bil, which translate to half of our assumption.

• Upstream reported that Sapura is poised to win a key offshore contract from ONGC for work on the fifth development phase of its subsea wells and pipeline replacement project (SSPRP-5) off west coast of India.

• Sapura’s likely win for SSPRP-5 follows a bid process in which a consortium involving United Arab Emirates-based Valentine Maritime and India’s Supreme Offshore had emerged as the lowest bidder at US$212mil vs. Sapura’s US$216mil, Larsen & Toubro’s US$227mil and Indonesia-based Timas Suplindo’ US$252mil.

• However, ONGC decided to disqualify the Valentine-led consortium on financial grounds and award the contract to Sapura, which was requested to match the lowest price.

• Before the project value was scaled down by over 15%, the work scope initially involved the installation of more than 200km of subsea pipelines and modification of platforms. This included engineering, procurement, construction and installation work for 125.6km of subsea pipelines across 29 segments, 11 umbilicals over 57km and topsides modifications at 31 offshore platforms.

• In 4QFY18, the E&C loss accelerated by 2.9x QoQ to RM84mil due to the seasonal trough amid low fabrication orders. However, its progress recognition is expected to improve with the rising momentum of fresh contract awards.

• Besides the RM16.6bil outstanding order book currently, more EPCIC jobs are expected, possibly from a central processing platform for the KG-DWN-98/2 deep-water project off India's east coast and 3 more wellhead platforms for Sapura’s own SK408 project. This is underpinned by the 37% QoQ increase in the group’s prospective tenders to US$13bil from new markets in the Middle East, Latin America, India and Africa.

• However, with crude oil prices now trading above US$70/barrel, the limelight has returned to Sapura's exploration and production (E&P) operation, with its proposed listing becoming much more likely and reinvigorates the group's overall rerating process.

• Hence, we believe that the stock is trading at an unjustified 0.3x of our SOP and 0.5x book value (vs. 0.9x for Bumi Armada).

Source: AmInvest Research - 18 May 2018