We are positive on the contracts wins as it demonstrates SAPNRG’s ability to secure jobs continuously. However, no changes to our earnings forecasts as the contracts are still deemed within our order-book assumptions. Upgraded to OP call with unchanged TP of RM0.820 pegged to 0.4x FY19E PBV following its recent share price weakness but likely to re-test all-time low of RM0.675 amidst global-led selldown which, in our view, provides better risk-reward proposition.

Five contracts award totalling RM905m. Yesterday, SAPNRG announced the winning of five contracts with a combined value of approximately RM905m. The firm contract period of these contracts varies from 1.5 to 4.5 years, spanning until FY23.

Won three EPCC contracts. We are positive as it demonstrates its ability to win contracts continuously amidst the competitive environment. While the contract value of each individual contract is not disclosed, we believe c. 50% of the value is attributable to 4.5 year minor EPCC for Bokor Betty Brownfield & Rejuvenation for Petronas Carigali Sdn Bhd (PCSB), which is expected to be completed by 2QCY22. Besides this, PCSB also awarded a contract to undertake the EPCC of Kinarut ERB West Compressor Upgrading Project for three years ending in 4QCY20. On the other hand, SAPNRG won another EPCC plus installation job for FFD Phase 2 Facilities, North Malay Basin from Hess Exploration and Production Malaysia B.V. for approximately two years ending 2QCY20.

Secured two T&I contracts. SAPNRG also secured two installation contracts, which are the T&I work for the Bokor CPP Project Malaysia Marine and Heavy Engineering Sdn. Bhd. and the provision of offshore/onshore pipeline and terminal Works for Fifth Oil Berth Project from Mumbai Port Trust. We anticipate the project margin to be in line with its international E&C project EBITDA margin of25%. (Refer table below for contract details.)

No change to our FY18-19E earnings as this first batch of contract wins of RM905m (approximately 6% of the 3Q18 outstanding orderbook of RM15.1b) in FY19 is well within our replenishment assumption of RM4.5b.

Monetisation of its E&P arm. Although it is pre-mature to assess the impact of the exercise given that ultimately, pricing is key consideration, we are POSITIVELY skewed towards this exercise given that it could (i) monetise its gas fields (7-10 tcf which has been discovered in SK310 and SK408 post acquisition of Newfields oil & gas blocks backed in Oct 2013) to fund the development of SK408, and (ii) ease some pressure on its balance sheet (1.26x as at end-3Q18).

Upgrade to OUTPERFORM call. As the share price has retraced 27% since the announcement of the disappointing 3Q18 results, we believe all the potential negatives could have been priced-in. Thus, we upgrade the stock to OUTPERFORM (from UNDERPERFORM previously) with unchanged TP of RM0.820 pegging to 0.4x FY19E PBV premising on: (i) undemanding valuation of 0.3x FY19 PBV, (ii) direct beneficiary of stronger crude prices, (iii) better contract flow, and (iv) potential monetisation of its E&P arm. Such valuation trades below -1.5S.D. of its 5-year mean pegging to the trough valuation of heavy asset upstream services players without immediate liquidation risk. Amidst global-led selldown, stock likely to re-test all-time low of RM0.675 which, in our view, provides better risk-reward proposition.

Downside risks to our call include: (i) weaker-than-expected margins, (ii) lower-than-expected contract replenishment, and (iii) contract termination.

Source: Kenanga Research - 6 Feb 2018