Despite the 76% decline in SAPE’s share price over the past 12 months, we believe it is still too early to revisit the stock. Downside risks remain from potential impairment, negative earnings surprises, uncertainty over orderbook replenishment, weak cashflows and potential listing of its E&P division that could eventually veer interest away from SAPE. Speculations of SAPE being removed from MSCI Malaysia index as a result of its market cap size may also pose some downside risk to the share price as foreign shareholding stood at 21% (as of end Jan-18). Maintain SELL with new RM0.40 target price.

E&P Listing - a Double-edged Sword

SAPE’s recent announcement of a potential listing of its exploration and production (E&P) business is positive in the long-run, in our view, as it would allow the group to unlock value and not be dragged down by the existing 2 business segments. However, this deal also works as a doubleedged sword as we believe if carved out completely, the ‘left-over’ SAPE would lose its appeal to many existing investors who believe in the monetization potential of its gas fields. Although still at an early stage, any move towards carving out the E&P division entirely for a separate listing, may therefore not be value accretive to the currently listed SAPE.

Concerns Over E&C and Drilling

The market’s biggest concern is regarding the outlook of its E&C and drilling divisions. Earnings have been on a declining trend with the drilling division falling into losses due to low rig utilization. While oil price has been trending upwards, oil majors’ capex remains lacklustre. As such, we believe that order book replenishment risks will continue to be investors’ main concern.

Recommend Taking Profit Ahead of Results

We cut our FY19E EPS forecast by 25%, but raise FY20E by 18% as we pencilled in a stronger RM and Brent oil assumption. We have revised our valuation methodology from SOP to P/NTA as the former is no longer viable due to expected losses. Reiterate SELL with a new target price of RM0.40 (from RM0.73) based on 0.6x FY19E NTA. Key upside risks include a recovery in contract wins, work activities and higher-thanexpected drilling rig utilization.

Source: Affin Hwang Research - 9 Mar 2018