Sapura has entered into a HOA with OMW AG to dispose 50% stake in its E&P business based on enterprise value of USD1.6bn. We are positive on the monetisation exercise as it helps to strengthen balance sheet via debt repayment and the remaining proceeds for capex development and working capital. Pending further details, we estimate that Sapura could potentially bag an USD400m disposal gain (c. +13% to its FY20 BV and our TP) but FY19-20 earnings could be reduced by 31%/42% subsequently. All in, maintain our earnings forecast and ex-rights TP of RM0.31 pending formalisation of SPA but upgrade to HOLD rating following the recent share price weakness.

NEWSBREAK

Sapura Energy has entered into a Heads of Agreement (HOA) for the proposed sale of a 50% stake in its wholly-owned subsidiary, Sapura Upstream to OMV AG based on an enterprise value of USD1.6bn. The HOA will suspend any ongoing listing process for Sapura Upstream pending the completion of the negotiations and definitive agreement. The final proposal is subject to the relevant regulatory and shareholders’ approvals. OMV AG is an Austria’s listed industrial company with international upstream portfolio in Romania, Austria and Russia. The company recorded EUR20bn revenue with daily production of 348k boe/day in 2017.

HLIB’s VIEW

Monetising its E&P business. We are positive on the strategic partnership with OMW AG business to develop its existing gas fields offshore Sarawak and its acreage in new markets in New Zealand, Gulf of Mexico and most recently, Australia.

To strengthen its balance sheet. We understand that Sapura is likely to utilise the proceeds from the disposal to repay its debt in order to lower its net gearing to a more comfortable level of 0.7x. Subsequently, the remaining proceeds will be used as working capital and capex development of future projects.

Limited disclosure for now. While pending for further details, we have done a simple back of envelope calculation on the potential impact to Sapura. We believe Sapura could recognise a gain of disposal of up to USD400m assuming (i) the sale proceed is USD800m (the enterprise value of USD1.6bn equals to the equity value of the upstream business given that all the debt is structured at the group level) and (ii) 50% of net asset of the business is worth USD391m (based on the segmental reporting disclosure in latest annual report). This would add to the FY20 net book value estimate by 13% to 78sen.

Forecast. We are keeping our earnings estimate for now, pending further details on the transaction. However, note that our FY20-21 earnings would be cut by 31% and 42% after factoring the 50% disposal in E&P business and potential interest cost savings subsequent to the debt repayment.

Upgrade to HOLD, TP: RM0.31 on ex-rights basis. We are keeping our ex-rights TP at RM0.31 pegging to unchanged 0.45x FY20 PBV. Note that the successful disposal would possibly increase our ex-right TP by another 4 sen (+13%). Upgrade to HOLD rating on Sapura following share price retracement of 15% since our downgrade post recapitalisation announcement coupled with the commitment from KWAP and PNB to support the rights issues, minimising the risk of under-subscription.

Source: Hong Leong Investment Bank Research - 13 Sept 2018