Investment Highlights

• We maintain our BUY recommendation on Sapura Energy (Sapura) but with a lower fair value of RM0.55/share (from an earlier RM0.79/share) based on a 25% discount to our ex-rights book value following the price adjustment after the group’s proposed rights issue announcement on Friday. Our revised fair value currently implies a 36% discount to our ex-SOP.

• Sapura has proposed a massive renounceable rights issue of up to RM4bil involving rights shares priced at RM0.30/share on a 5- for-3 basis with 1 free warrant for every 10 rights shares subscribed together with new Islamic redeemable convertible preference shares (RCPS) at RM0.41/RCPS to be allocated on a ratio of 2 RCPS-to-5 shares.

• The warrants are exercisable at any time within 7 years at RM0.49/warrant while the RCPS, which carries a dividend rate of 5%, can be converted only upon the maturity at the end of 5 years on a ratio of 1 RCPS for 1 new share.

• Substantial shareholder Sapura Technology with a 16% equity stake has expressed interest in the rights exercise with a minimum commitment of RM300mil. PNB with a 6% stake has also expressed support for its entitlement.

• Assuming the full conversion of the RCPS, this rights exercise will expand Sapura’s share base by 3.1x to 18.4bil, halving the group’s FY18 NBV/share to RM0.73 and cut our SOP/share by 70% from RM2.88 to RM0.87.

• This exercise is primarily aimed at repaying the group’s shortterm debt of RM3.9bil as at 30 April 2018 which is due in February 2019. It will cut the group’s FY19F net gearing from 1.6x to 0.8x, enabling the group to releverage for the working capital required for the fresh EPCIC jobs which are increasingly much larger in scope and value.

• The lower gearing will cut the group’s interest cost by 22% to RM650mil while the group’s impairments in FY17-FY18 have already reduced its 1QFY19 depreciation charges by 20% YoY.

• As management’s aim to reduce its net gearing to 0.6x-0.7x will not be attained by this exercise alone, Sapura is concurrently aiming to list its exploration & production business together with possible strategic partnership for the drilling division which posted a 1QFY19 loss of RM69mil due to low rig utilization rates.

• Since the share price has already reacted to this development, which was forewarned in our 1QFY19 results update, we are neutral on the group’s needed deleveraging exercises which will reposition Sapura to a stronger operational and financial structure to capture the rising global momentum of new EPCIC projects.

• In 1QFY19, Sapura secured RM4.5bil new orders, already 41% of the RM11.1bil contracts achieved over 3 years in FY16-FY18 and account for 78% of our unchanged FY19F revenue. The group is now tendering for US$7.4bil (RM30bil) with further addressable prospects of US$10.2bil (RM42bil). The stock still trades at a low ex-PBV of 0.8x currently vs. 0.9x for Bumi Armada.

Source: AmInvest Research - 27 Aug 2018