Positive on new contract wins, boosting YTD wins to RM7b and order-book to RM18b - highest in almost three years. Post-contract award, we raised FY19-20E earnings by 4- 30%, on a higher replenishment assumption of RM8b (from RM5.5b previously). Positive outlook for FY20 onwards amidst fresh capital injection, but maintain MP and ex-rights TP of RM0.34 (cum-TP of RM0.41) as we remain cautious of anticipated selling pressure during the rights listing.

New contracts awarded. Yesterday, SAPNRG announced the award of six new contracts, with a combined value of c.RM1.75b. These include: (i) two engineering, procurement, construction, transportation and installation (EPCTI) contracts in the Gulf of Mexico, and (ii) four contracts for the provision of Pan Malaysia Underwater Services (refer table below for the detailed breakdown).

Positive on the contract wins. Overall, we are positive on the contract wins as it highlights the company’s competitiveness in the market, as well as its jobs winning ability despite its worrying balance-sheet of late. In fact, these new wins lift the company’s order-book to RM18b – the highest in almost three years, and bringing YTD wins to a total of RM7b. We expect EBIT margins for these contracts to be within the range of 10-20%. Post-contract award, we tweaked our FY19-20E earnings forecasts by an additional 4-30%, after increasing our FY19 order-book replenishment assumption to RM8b (from RM5.5b previously).

New broom sweeps clean. Moving forward, SAPNRG is poised to start anew from FY20 onwards after the injection of fresh capital amidst its capital raising efforts. Its recapitalisation exercise (consisting of rights issue with warrants and RCSP-i) to raise RM4b is deemed as an almost-guaranteed success, having secured underwriting support from PNB, Maybank and Credit Suisse, pending shareholders’ approvals in its upcoming EGM on 29 Nov 2018, while its 50% disposal of its E&P- arm to OMV to raise c.USD800m has also progressed to a definitive agreement (from heads of agreement previously), also subject to regulatory and shareholders’ approvals with target completion in 1QCY19. All-in, this is expected to improve its net gearing level to roughly 0.7x, from 1.7x as at end-2Q19. The improved post-FY20 outlook is further backed by the company’s display of healthy recovery in jobs flow of late, which can only be strengthened by its improved balance sheet and working capitals post-capital injection, while retaining its track record commendable jobs execution delivery.

Maintain MARKET PERFORM, with an unchanged ex-rights TP of RM0.34 (cum-TP of RM0.41), pegged to 0.4x PBV – close to -1.5SD of its mean. Despite the positive outlook from FY20 onwards, we still remain cautious over the stock for the immediate term, in anticipation of selling pressure should its rights issues are listed given the hefty capital outlay required – RM0.66 per existing share (RM0.50 for ordinary share rights and RM0.16 for RCPS-i), as well as the heavy share base dilution. That said, we see a more certain buying window after its ex- rights period.

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 capital raising efforts.

Source: Kenanga Research - 22 Nov 2018