We are positive on the formalisation of strategic partnership with OMV as it allows Sapura to (i) bag USD649m gain on disposal, (ii) further strengthen its balance sheet (FY20 net gearing lowered to 0.6x from 0.9x) via debt repayment and (iii) jointly develop its gas fields by leveraging on OMV’s technical capabilities. Despite our FY20-21 earnings is cut by 15%-32 subsequently, we upgrade the stock to BUY rating with higher ex-rights TP of RM0.41 (from RM0.34) pegging to unchanged 0.5x FY20 P/B.

NEWSBREAK

Following the announcement of Head of Agreement entered between Sapura Energy and OMV in September, both parties entered into subscription agreement whereby OMV will subscribe 50% share capital of SEB Upstream Sdn Bhd (SUP), the new JV formed which holds the entire equity interest of Sapura’s upstream business for USD540m with additional cash payment up to USD85m subject to additional consideration. Meanwhile, the JV will also repay inter-company debt of USD350m to Sapura, which adds the maximum proceeds raised by Sapura to USD975m. The transaction is targeted to be completed by end-Jan next year subject to shareholders and regulatory approvals and subsequently, Sapura will bag a gain a disposal of USD649m.

Note that the USD85m additional cash payment is split into (i) USD55m portion, which is dependent on FID of Block 30, Sureste basin in Mexico and (ii) USD30m portion, which is subject to Brent oil price movement in 2019-21. Both payments are only payable 3-4 years later.

HLIB’s VIEW

Joint management with the focus on SEA. We are positive on the strategic partnership with OMV to develop its existing gas fields offshore Sarawak and its acreage in new markets in New Zealand, Gulf of Mexico and most recently, Australia especially by leveraging on OMV’s operatorship experience. Moving forward, the JV will be jointly managed by both parties with equal split of number of directors and it will primarily grow its business on South East Asia region.

To strengthen its balance sheet. Sapura will utilise USD720m proceeds to repay its debt and the other USD160m for working capital purposes. Subsequently, its FY20 net gearing will be lowered to 0.6x from 0.9x (factoring impact of right issuance) and generate interest savings of RM138m/annum @ 4.6% interest rate.

Forecast. Assuming the transaction is completed by end-Jan next year, our FY20-21 earnings is reduced by 15% and 32% after factoring the 50% disposal in E&P business and potential interest cost savings subsequent to the debt repayment.

Upgrade to BUY, TP: RM0.41 on ex-rights basis. Despite the earnings cut, there will be a substantial boost to its BV from disposal gains post monetisation of the E&P business. As such, our ex-rights TP is adjusted to RM0.41 (from RM0.34) pegging to unchanged 0.5x FY20 P/B. Upgrade to BUY rating (from Hold) on the counter as the monetisation exercise will further strengthen its balance sheet (net gearing lowered to 0.6x as of FY20) eliminating near term financial risk. The strategic partnership with OMV, in our view, will result in better execution of SK408 gas field development. Separately, the potential of Sapura being appointed as one of the Saudi Aramco’s long term agreements (LTA) contractor, as reported by Upstream and improving contract flow will be additional positive catalysts to Sapura. In addition, share price has also declined 45% YTD.

Source: Hong Leong Investment Bank Research - 12 Nov 2018