Yesterday, SAPNRG announced the proposed disposal of 50%-stake in its E&P arm. We are positive on the disposal and valuation of USD1.6b, as it would be book value accretive, and help improve its job-bidding prospects, while also being earnings positive post interest savings. We made no changes to earnings assumptions, pending further development. Maintain MP with ex-TP of RM0.34, as we are still cautious over the group’s recapitalisation exercise.

Disposal of E&P arm. Yesterday, SAPNRG announced that it has entered into a head of agreement for the proposed disposal of 50% of its wholly-owned subsidiary, Sapura Upstream, which is understood to be the group’s exploration and production (E&P) arm, to OMV AG. OMV AG, one of Austria’s largest oil and gas company listed in the Vienna Stock Exchange, has a workforce of more than 20k employees and daily production of approximately 348k boe/day as in 2017. The transaction is based on an enterprise value of USD1.6b, and both parties have agreed to continue ongoing negotiations on an exclusive basis. Likewise, this also effectively suspends any ongoing spin-off listing efforts for SAPNRG’s E&P arm, pending completion of the negotiations.

Taken aback, but positive on the announcement. We were surprised by the group’s decision to go down the disposal route for its E&P arm given that they have always been guiding for a spin-off listing for capital raising. Nonetheless, we are positive on the valuation of USD1.6b (or approximately RM6.6b), implying a PBV of roughly 2x – which is on the higher-end of our estimated E&P listing valuation range of around 1-2x PBV. Nonetheless, we believe the capital raised will improve the group’s tender and order-book visibility as the added working capital would enhance the group’s prospects at job bidding.

Financial impact of the disposal. Post-disposal, SAPNRG’s book value is expected to be bumped up by an additional c.RM1.7b (or approximately 13% of FY19-20E ex-rights book value), thus implying an additional 4.0 sen upside from our current TP. Meanwhile, netgearing will also be improved to around c.0.7x, from an estimated c.0.8x post-rights issue or 1.6x as at end-1Q19. Based on our model, the move is expected to bump FY20E earnings by RM63m (or 32%), taking into account; (i) 50% loss of E&P earnings, contributing to lowered FY20E earnings by RM85m, while offset by (ii) interest savings from paring down of debt using the RM3.3b raised (50% of RM6.6b), resulting in a c.RM149m positive bottom-line impact (based on finance cost assumption of 4.5%). Nonetheless, given that no timeline was mentioned in the announcement, and the disposal is still under head of agreement (i.e. non-legally binding), we have opted to keep our FY19- 20E figures unchanged for now. Note that our current figures have already taken into account interests savings arising from the recently proposed recapitalisation exercise.

Maintain MARKET PERFORM. Post-model update, we raised our exTP slightly to RM0.34, from RM0.33 previously, based on unchanged valuation of 0.4x PBV. While we believe the E&P disposal should serve as a positive share price catalyst, we remain cautious on the counter given the hefty capital outlay required by shareholders, as well as the huge share base dilution, arising from the recapitalisation exercise. That said, further rebound in share price would improve the likelihood of a successful rights issue, given that the rights issue price is at RM0.30. Risks to our call include: (i) better-than-expected margins, (ii) greater number of job wins than expected, and (iii) falling through of the group’s recapitalisation exercise.

Source: Kenanga Research - 13 Sept 2018