Sapura has secured four contracts (3 E&C and 1 drilling contracts) with a combined value of RM815m. We are positive on the four contracts secured, which reaffirmed Sapura’s competitiveness. However, we made no changes to our earnings forecasts as YTD win of RM5.2bn is still deemed within our order book replenishment of RM6bn pending 2QFY19 results announcement this week. All in, maintain HOLD rating on the stock with higher cum/ex-rights TP of RM0.42/RM0.34 as stronger contract flow would be offset by near term earnings weakness.

NEWSBREAK

Sapura Energy has announced four contract awards with a combined value of approximately RM815m. The periods of these contracts vary from few months to 5 years, spanning until FY24.

HLIB’s VIEW

Won three E&C contracts. We are positive on the contract wins as they showcase its ability to secure jobs continuously amidst the competitive environment. While the contract values of each individual contract are not disclosed, we believe bulk of the value is attributable to 5 year provision of Pan Malaysia maintenance, construction and modification contract for ExxonMobil Exploration and Production Malaysia Inc (EMEPMI) in Peninsular Malaysia water, which is expiring by July CY23 with one year extension option. Besides this, Sapura was awarded offshore installation works for East Spar Intelligent Pigging and Removal Project for Quadrant Energy in Australia. On the other hand, Sapura won a subcontract by Saidel Limited for the provision of construction engineering and offshore construction of a 16” Southern SWAMP Sales Gas Evacuation Pipeline Project in the Delta Region of Nigeria operated by Shell Petroleum Development Company of Nigeria. Note that both jobs have already started recently and are expected to be completed by 4QFY19. We reckon that these E&C projects to match its targeted EBITDA margins of 25%.

1+1 year drilling contract. Sapura also secured a contract extension for the provision of a semi-submersible tender assisted drilling rig, “Sapura Pelaut” by Brunei Shell Petroleum Co. Sdn. Bhd. Recall that Sapura Pelaut has been working with Shell Brunei for more than 20 years and the extension contract will commence from 1Q FY20. We understand that there is no rate adjustment on the DCR. Thus, we estimate the DCR to hover around USD120k/day.

Forecast. With these RM815m contract wins announcement, Sapura’s YTD win is lifted to RM5.2bn, accounting for 87% of our FY19 order book replenishment assumption of RM6.0bn. We are keeping our earnings estimates for now pending 2QFY19 results announcement this week.

Maintain HOLD, cum/ex-rights TP: RM0.42/RM0.34. We increase our cum/ex-rights TP to RM0.42/RM0.34 (from RM0.33/RM0.31 previously) pegging to higher 0.5x (from 0.45x) FY20 PBV with the expectation of improving outlook amidst oil prices approaching USD80/bbl level. Note that the successful disposal of 50% stake in its E&P arm would possibly increase our ex-right TP by another 13%. Maintain HOLD rating on Sapura as stronger contract flow would be offset by near term earnings weakness.

Source: Hong Leong Investment Bank Research - 25 Sept 2018