Update

• Sapura Energy proposed a recapitalisation exercise to raise up to RM4b which includes:
• a) rights issue of 5 rights shares (priced at 30 sen) for every 3 shares held
• b) a free warrant for every 10 rights shares (with an exercise of 49 sen)
• c) rights issue of 2 Islamic redeemable convertible preference shares (RCPS-i) for every 5 shares held with an issure price of 41 sen, 1-for-1 conversion and dividend rate of 5%

• Proceeds will be used to pare down borrowing to RM12.65b from RM16.42b currently and effectively reduce interest cost to RM650m from RM834m. This would translate into a lower gearing ratio of 0.94x from 1.74x currently. The exercise is expected to complete in 4Q18

Earnings Outlook

• Earnings forecast lifted – We are raising our EPS forecast for FY20 by 73% due to reduced interest cost by RM184m.

• Steady orderbook – Orderbook stands at RM16.7b after winning RM4.5b worth of new contracts in 1QFY19. This year, Sapura Energy has tripled its bidding to US$7.4b from US$2.5 in 2017 in order to keep more jobs in the funnel.

• Prospects are expected to be flat until earnings streams start to flow from the SK408 field and activity in the oil and gas industry takes off next year. The SK408 field will come on stream in late CY2019. Sapura’s net reserve stands at 253 mmboe (95% gas, 5% oil) that could last for over a decade.

Valuation & Recommendation

• Following Friday’s announcement and selldown in share price, we are lowering our recommendation to FULLY VALUED from BUY with a target price of RM0.42 (adjusted from RM0.80 due to enlarged share base) based on 0.5x P/B and a NTA of RM0.84 per share.

• Future catalyst on upstream listing – Share price was bogged down by the cash call announcement.

However, investor sentiment could improve with the potential listing of its Exploration and Production division and possible strategic partnership for its loss making Drilling division.

Source: JF Apex Securities Research - 27 Aug 2018