We cut SAPNRG to MARKET PERFORM as we are negative on its cash call given the heavy share-base dilution coupled with hefty capital injection required from shareholders. The recapitalisation exercise is expected to raise RM4.0b to pare down debts, with net gearing lowered to c.0.8x from 1.6x while FY20E core earnings are lifted by an additional 2.8x due to interest savings. Our new cum/ex-TP is also reduced to RM0.40/0.33, from RM0.77 previously.

Recapitalisation exercise. Last Friday, SAPNRG announced a recapitalisation exercise, which includes; (i) proposed rights issue on the basis of 5 rights for every 3 shares, issue price of RM0.30, together with 1 free warrant for every 10 rights, exercisable at RM0.49 within 7 years, and (ii) proposed rights issue of Islamic redeemable convertible preference shares (RCPS-i) on the basis of 2 RCPS-i for every 5 shares, at an issue price of RM0.41, 5% dividend rate, and 1-to-1 conversion after 5 years. Targeted timeline for the listing of rights and RCPS-i is by end of the calendar year.

Proceeds for borrowings repayment. All-in, the recapitalisation exercise is expected to raise a total of RM4b (RM3b from the rights issue, and RM1b from the RCPS-i), which will be primarily used for borrowings repayment. Post-exercise, we estimate SAPNRG’s netgearing to be reduced to c.0.8x, from 1.6x currently (group’s total borrowings stood at RM16.5b as at end-1QFY19). We have also adjusted our FY20E core earnings to RM195.6m (previously RM51.6m) to account for the savings in interest expenses.

Forced move? We gathered that the company has RM3.8b of debt due in Feb 2019, while it has also maxed out all its bank guarantee facilities for performance or bid bonds. As such, we feel that the success of the recapitalisation exercise may be vital for the company to avoid facing risks of borrowings default. All-in, we are negatively biased towards the exercise given: (i) the huge share-base dilution, which could see its share-base jump by 3.2x (or 3.1x assuming no warrants conversion) post-exercise, coupled with (ii) the hefty capital injection required by shareholders to undergo the entire exercise. As an illustration, based on our calculations, shareholders would have to fork out RM0.66 per existing share to subscribe to the entire exercise (RM0.50 per existing shares for the rights, and RM0.16 for the RCPS-i).

Increased jobs bids and further capital raising efforts. Nonetheless, the de-leveraged balance sheet post-exercise would allow the company enhanced working capital capabilities to perform on its jobs bids, which jumped to USD7.4b for 2018 (vs USD2.5b for 2017) on top of additional prospective bids of RM10.2b, as well as execute its order-book of RM16.7b as at end-1QFY19 (improved from RM14.9b as at end-FY18). Moving forward, the company could also be seeking to raise additional capital through the spin-off listing of its E&P arm by end of the year. We guesstimated listing valuations to be around 1-1.5x PBV (E&P segment’s book value that stood at RM4.1b as at end-FY18).

Downgrade to MARKET PERFORM. Given the heavy capital outlay required, which the market might not have the appetite to digest, we have decided to lower our valuations to 0.4x PBV at -1.5SD (from 0.5x at -1SD previously); thus, arriving at a lower cum/ex-TP of RM0.400/RM0.330 (from RM0.770 previously). We note that any further downward revision of its rights issue price could pose further pressure on its share price, thus possibly warranting further de-rating. Risks to our call include (i) stronger-than-expected margins, and (ii) greater-than-expected contracts replenishment.

Source: Kenanga Research - 27 Aug 2018