• We initiate coverage on Sapura Energy with a BUY call and TP of RM0.15 premised on our optimism that the new management team is capable to execute its transformation plan aided by improving market condition.
• Sapura is one of the largest oil and gas services companies in Malaysia, capable of securing offshore projects abroad, leveraging on its strong engineering and offshore construction capabilities.
• In near-term, the company is looking to undergo portfolio transformation through disposal of non-core assets. We think this could improve its capital structure and unlock its value.
• Currently, the stock is trading at 0.2x P/B which is -1SD to 5-year forward P/B. We think this is not justified given the stronger outlook in O&G projects space.

A global oil and gas service company

Despite its huge debt, we admire Sapura Energy’s in-house engineering capabilities and deep expertise in offshore construction which enables the company to secure contracts from abroad. We think the company will be able to unleash its true potential as the new management team is forging ahead with its transformation plan.

Favourable external factors to support transformation plan

We see a little headwind for the management to execute its turnaround plan aided by (i) new upcycle in O&G offshore projects, (ii) higher oil price to expedite new project sanction and contract award, (iii) expanding tenderbook from successful venture into new growth market, (iv) strong support from debtholder which led to successful refinancing and sufficient working capital line to execute project in hand, and (v) low balance sheet risk from proper asset impairment exercise in the past.

Improvement in bottomline to be gradual

We expect Sapura Energy to gradually improve its bottomline moving forward, driven by expansion in E&C orderbook and higher demand for its tender rigs. In E&C, we expect the company to secure orderbook worth USD1.25-2bn in FY22-24F whereas its operating tender rigs to rise to 9 units in FY24F (1HFY22: 7 units).

Initiate with BUY and TP of RM0.15

We initiate coverage on Sapura Energy with TP of RM0.15 based on sum-of-parts (SOP) method. This implies 0.3x FY23F P/B. Currently, the stock is trading at 0.2x P/B which is -1SD to 5-year forward P/B. We think this is not justified given the stronger outlook in O&G projects. We think the stock price will also re-rate upon the successful transformation of the group, which we are fairly confident to succeed.

Transformation is work-in-progress

We are optimistic with Sapura Energy’s turnaround story driven by the introduction of several strategic initiatives led by new CEO Anuar Taib to ride on new upcycle in oil and gas offshore capex spending. Our view is further elaborated as below:

• New strategic direction to unleash its true potential. We are affirmative on its future prospect as the new management looks to restructure its business operation. Following the retirement of Tan Sri Shahril Shamsuddin as the group CEO, he was succeeded by Datuk Mohd Anuar Taib who was Petronas’ former executive vice president and the CEO of Petronas Carigali SB since 2016. Prior to that, he has served Royal Dutch Shell’s subsidiary in Malaysia for over 20 years, culminating as Managing Director of Sarawak Shell Bhd and Sabah Shell Petroleum Company. Leveraging on his network and deep insights accumulated during his stint with the regulator and O&G operator companies, we believe this will help the company to secure more jobs in near future and help the management to successfully execute its transformation plan.
  Besides that, his leadership will also be supported by Tan Sri Shamsul Azhar Abbas who was earlier appointed as the non-executive Chairman of the company. He was the former President and CEO of Petronas from 2010 to 2015 and his appointment was made via the nomination as a nominee director for the company’s largest shareholder, PNB. While the new management has not finalised its transformation plan, they aspire the company to shift towards an asset light model and to generate significant amount of recurring revenue in the long-run. In the near-term, it will pursue portfolio transformation through (i) sale of its non-core businesses, (iii) enhancing its offering in its key strengths area and (iii) pursuing growth in renewable energy (RE) space.
• Disposal of assets could unlock value. We reckon that the company may continue with its earlier plan to monetise its drilling rigs assets and to dispose of its profitable JV entities as these assets do not generate high ROA to the company, in our opinion. The proceeds then can be channelled towards improving its capital structure by lowering debt and generate interest cost savings. As at end FY21, the carrying value of these assets stands at c.RM7.8bn, making up 88% of its net book value of RM8.9bn. 
  We think that there is little risk for further asset impairment particularly on its drilling rigs as the company has accumulated RM3.7bn of impairment charges since FY2016. In addition, the improved market condition will also help to cushion any adverse impact on this in future.
• Upcycle in upstream spending. We remain sanguine with the upcoming upcycle in offshore spending following the long period of underinvestment subsequent to oil price collapse in 2014/15. This, coupled with its market expansion efforts in the past, has more than quadrupled its bids and prospective projects to USD35bn (RM142bn) from USD8.2bn in 2017. This is coming mainly from its engineering and construction (E&C) segment (see Chart 1). This includes submitted bids of RM17bn whereas bids in progress are worth RM18bn. With oil price currently hovering above USD80/bbl, we believe oil and gas companies will proceed with the project sanction sooner rather than later. We expect this to boost its orderbook which is currently stands at RM7.5bn (see the segmental orderbook breakdown in Chart 2). Meanwhile, its JV entities have also secured projects valued at RM7.2bn.

Source: BIMB Securities Research - 14 Oct 2021