What’s New

• Sapura has signed the deal to divest 50% stake in its wholly-owned exploration and production (E&P) subsidiary, Sapura Upstream to OMV AG for US$890m (RM3.7b) cash, of which US$720m (RM3b) will be used to repay its debt while another US$160m (RM667m) will be reserved for working capital.

• OMV also agreed for an additional consideration worth US$55m plus up to another US$30m in contingency funds mainly linked to the resource volume in Block 30, Mexico.

• In total, Sapura Energy would receive minimum cash proceeds of between US$920m and US$975m and book a gain of disposal of US$649 million.

Comment

• We view the deal as positive as it unlocks the value of Sapura Upstream, lift Sapura Energy’s debt burden and create synergy in exploration and development activities as OMV has upstream assets around the world with proven reserves of 11.5 bboe and daily production of 348,000 barrels/day. The deal is expected to be completed in 1QCY19

• Lower gearing– Combining with the proceeds from the rights issue with the stake sale to OMV, management aims to reduce debt significantly from RM16.4b currently to RM9.8b and lower its gearing level to 0.62x from 1.74x currently. Management expects this to translate into lower interest cost by RM320m.

Earnings Outlook

• FY20 forecast lifted – We are raising our net profit forecast for FY20 by over 10 folds to RM2.46b due to interest savings from repayment of debt and gain from disposal of RM2.7b while FY19 estimate is kept unchanged.

Valuation & Recommendation

• We are lifting our recommendation to BUY from HOLD with a higher target price of RM0.50 (previously RM0.42) based on 0.5x P/B and a higher NTA of RM0.99 per share.

Source: JF Apex Securities Research - 12 Nov 2018