Despite the RM4.0bn recapitalisation exercise is essential for Sapura to lower its gearing level for bigger projects to capitalise on improving job market, we reckon share prices to remain under pressure due to its BVPS/EPS dilution amidst unexciting quarterly results. After imputing interest savings, FY19 losses are narrowed by 2% whilst FY20-21 earnings increases by 9.8x (low base effect) and 62%. On a fully diluted basis, FY20 EPS is adjusted upwards by 2.4x to 0.89 sen while FY21 EPS is diluted by 50% to 2.12 sen. Downgrade to SELL rating with lower ex-TP of RM0.31 (from RM0.61) pegged to higher PBV multiple of 0.45x (from 0.4x) on FY20 fully diluted BVPS of RM0.69.

NEWSBREAK

Sapura Energy proposed to issue up to (i) 9.99bn rights shares (5 rights for every 3 shares) at issue price of RM0.30 along with 998.7m free warrants (1 for every 10 rights with exercise price of RM0.49) and (iii) 2.40bn Islamic redeemable convertible preference shares (RCPS-i) (2 for every 5 shares at issue price of RM0.41, convertible at mature date after 5 year tenure) to raise collectively up to RM4.0bn. The proposed rights issue of shares with warrants will be undertaken on full subscription basis. Sapura Technology Sdn Bhd, which owns 16.5% stake in Sapura has indicated to support the right for minimum amount of RM300m (10% of the rights) while another substantial shareholder, PNB with 12% stake also expressed its interest to underwrite, in which, the amount has yet to be determined. Bulk of the proceeds will be used to repay its debt which is due Feb next year. The proposed exercise is expected to be completed by end of this year subject to shareholders’ approval.

HLIB’s VIEW

To bid more projects. While the sentiment towards such highly dilutive exercise is rather negative as evident by the sharp share price plunge of 30% after the announcement on last Friday, we believe the proposals are essential to relax its stretched financial situation which already capped its capability to tender for more projects. Post rights, its gross gearing will be lowered to 0.94x from 1.74x as of 4QFY18 and generate interest savings of RM190m/annum @ 4.8% interest rate. In the analyst briefing held on last Friday, management highlighted that the company will be able to bid for bigger sized projects (USD500m-USD2bn) amidst improving job market and penetration of new market post deleveraging. Current bid stood at USD7.4bn with another USD10.2bn prospect across different regions.

Forecast. After imputing earnings savings, (i) FY19 net losses estimate is narrowed by 2% to RM264.0m and (ii) FY20-21 earnings forecast jumps by 9.8x (low base effect) and 62% to RM172.9m and RM411.2m respectively. On a fully diluted basis, FY20 EPS is adjusted upwards by 2.4x to 0.89 sen while FY21 EPS is diluted by 50% to 2.12 sen.

Downgrade to SELL, TP lowered to RM0.31 on ex-rights basis. Share base is enlarged by 1.7x to 15.98bn post rights from 6.0bn previously and to 19.3bn on a fully diluted basis upon conversion of RCPS-I and warrants. Its forward 3-year BVPS is also diluted by 53-54% All in, our TP is lowered to RM0.31 (from RM0.61) on an ex rights basis (RM0.36 on a cum right basis) pegging to higher PBV multiple of 0.45x (from 0.4x) on FY20 fully diluted BVPS of RM0.71. This implies 12% downside as compared to the theoretical ex-rights last traded price of RM0.35. Downgrade to SELL rating on Sapura due to short term overhang from such highly dilutive exercise and potential weak quarterly results.

Other Highlights

Other strategic plans. Sapura has completed its independent valuation on the E&P business and targeting to list it on the Australian Securities Exchange (ASX) by end of the year. On the other hand, the company is actively talking to other international drillers for strategic partnership with the likelihood to penetrate the niche market, i.e. drillship segment.

Sharp fall after the announcement. Share price retraced by 31% in the second half of the trading session last Friday to close at RM0.415 after the multiple proposals announcement. Therefore, the right issue price of RM0.30 represents only 14% discount to its adjusted theoretical ex-rights price (TERP) of RM0.35 based on last traded price (vs. original TERP of RM0.41 as stated in the circular based on 5-day volume weighted average market price up to 23 Aug 2018).

Velesto recapitalisation exercise as a reference? Recall that Velesto also proposed to continue its recapitalisation exercise (announced in Jan-17) in May last year at lower rights price of 30 sen which quadrupled its share base to 8.2bn while abandoning its acquisition of Icon and Orkim. Three months subsequent to the announcement, we saw the share price plunge from c.RM0.70 all the way to the rights price and subsequently hovering around that level in the past one year. We believe the strong selling pressure on Velesto was mainly due to (i) continuous weak quarterly results announcement for 1Q17 and 2Q17, (ii) high impairment and (iii) lack of near term catalysts.

Would Sapura Energy be the same case? We do not discount the likelihood of near term selling pressure towards the rights price level as results in the coming two quarters are likely to remain in the red. On a longer run, we reckon that the situation for Sapura could be better on the latter two arguments for Velesto. As the drilling segment is gradually picking, we do not anticipate significant impairment to the drilling assets at the end of year. Secondly, there might be further value unlocking should Sapura is able to list its E&P arm at an attractive valuation.
 

Source: Hong Leong Investment Bank Research - 27 Aug 2018