Yesterday, SAPNRG announced securing four new contracts worth RM815m. Overall positive on the development which reaffirmed its jobs winning ability and competitiveness. No changes to earnings forecasts as the wins are still narrowly within our order-book replenishment assumption, and also pending the upcoming 2Q19 results release. Maintain MP with ex-TP of RM0.34, as we remain cautious over its recapitalisation exercise.

Won four contracts. Yesterday, SAPNRG announced the securement of four contracts with a combined value of approximately RM815m. These include: (i) 5-year Pan Malaysia MCM contract from ExxonMobil, (ii) offshore installation works for Quadrant Energy Australia, (iii) construction engineering for 16” x 18.4km gas pipeline for Saidel (Nigeria), and (iv) extension of contract from a semi-submersible tender assist drilling rig for Brunei Shell Petroleum (refer table below for breakdown details).

Pan Malaysia MCM the largest chunk. Of the contracts announced yesterday, we believe that the Pan Malaysia MCM contract from ExxonMobil to carry the largest value, with our guesstimate at around c.RM400m, although the actual value would be dependent on work orders issued as it is a call-out contract. Nonetheless, we are positive on the award as (i) we gathered that this is a re-engagement of SAPNRG by ExxonMobil in continuation of its prior maintenance contract awarded back in 2013, thus indicating its commendable job execution as well as client retention ability, while also (ii) providing additional jobs flow and earnings visibility. We expect EBIT margins within the range of 10-20%.

Forays into Nigeria and Australia. Meanwhile, its gas pipeline contract from Saidel marks the group’s maiden entry into Nigeria, while offshore installation works for Quadrant Energy also marks its second contract win in Australia (maiden win in Australia were offshore exploration contracts by Finder Exploration, announcement dated 4 September 2018). While the individual values of the contracts were not disclosed, we are overall positive on the wins as it represents the group’s continued efforts to capturing new markets, while also highlighting the group’s ability to win contracts continuously amidst a competitive environment. We expect these two jobs to fetch EBIT margins at around c.15%. Elsewhere, extension of the drilling rig “Sapura Pelaut” would provide added utilisation visibility (currently c.99% utilisation) and some earnings clarity.

No changes to earnings for now. These new contracts bring YTD wins to RM5.3b (approximately 32% of end-1Q19 order book of RM16.7b), which is still narrowly within our FY19E order book replenishment assumption of RM5.5b. As such, we are opting to make no changes to our current FY19-20E earnings forecasts for now, and also pending the release of its 2Q19 results later this week. Note that any further contract wins for the remainder of the year would theoretically warrant an earnings upgrade.

Maintain MARKET PERFORM, with unchanged ex-TP of RM0.34 (cum-TP of RM0.41), pegged to 0.4x PBV. Our ascribed PBV valuation is still close to -1.5SD of its mean, as we remain cautious over its recapitalisation exercise given the hefty capital outlay required (RM0.66 per existing share – RM0.50 for rights, and RM0.16 for RCPS-i), coupled with the huge share base dilution (by 3.1x excluding warrants conversion).

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 - 25 Sep 2018