We are positive on its EPCIC of ICPP for Pegaga Development Project contract win which is estimated to be worth up to RM2.0b. We make no changes to our earnings forecasts as the contract win is deemed within our orderbook assumptions, pending its 4Q18 results announcement. Reiterate OP call with unchanged TP of RM0.820 pegged to 0.4x FY19E PBV in view of the recent overdone share price retracement.

Won EPCIC of Pegaga’s ICPP contract. Yesterday, SAPNRG announced a contract award entailing engineering, procurement, construction, installation and commissioning (EPCIC) of an offshore integrated central gas processing platform (ICPP) facility in Block SK320, offshore waters of Sarawak for Pegaga Development Project from Mubadala Petroleum (MDC Oil & Gas (SK320) Ltd). The contract is expected to commence in 2QCY18 and to be completed by 3QCY21.

Contract value estimated to be worth up to RM2.0b. We are positive on this second contract win in FY19, which demonstrates its ability to win contract continuously amidst the competitive environment. According to Upstream, the entire Pegaga development project is worth c.USD1.0b (RM3.9b). Separately, SAPNRG’s latest press release stated that this win will bring its YTD contracts secured to “nearly RM3.0b”. We estimate the EPCIC contract value to worth up to RM2.0b, doubling the 19k metric-tonne weighted Bokor’s CPP, which is valued at RM1.0b. We reckon the project EBITDA margin to match its 9M18 E&C performances at 15%, anticipating RM100m EBITDA per annum (c. 8% of our FY19 estimates).

No change to our FY18-19E earnings. With the latest contract win estimated at RM2.0b (approximately 13% of the 3Q18 outstanding order-book of RM15.1b), this brings its YTD win to RM2.9b, which is well within our expectations, accounting for 64% our replenishment assumption of RM4.5b in FY19. Therefore, we are keeping our estimates pending announcement of 4Q18 results end of the month.

Monetisation of its E&P arm. Although it is pre-mature to assess the impact of the exercise given that ultimately, pricing is key, 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).

Keeping OUTPERFORM call. Given the share price’s retracement of 47% since the announcement of the disappointing 3Q18 results, we believe all the potential negatives could have been priced-in. Thus, we are reiterating OUTPERFORM call on the counter with unchanged TP of RM0.820 pegging to 0.4x FY19 PBV premising on: (i) undemanding valuation of 0.2x FY19E 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 -1.5SD of its 5-year mean being pegged to the trough valuation of heavy asset upstream services players without immediate liquidation risk. Downside risks to our call include: (i) weaker-than-expected margins, (ii) lower-than-expected contract replenishment, and (iii) contract termination.

Source: Kenanga Research - 22 Mar 2018