We are positive on the contracts secured totalling to RM760m, bringing YTD wins to c.RM9b (in line with our replenishment assumption) and order-book to c.RM19b – highest in over two years. No changes to FY19-20E numbers. Upgrade to OP, with TP of RM0.34 pegged to 0.4x PBV, given its positive outlook for FY20 onwards, underpinned by strong display of job flows recently, further backed by its improved balance sheet post-capital injection.

New contracts / extensions awarded worth RM760m. Yesterday, SAPNRG announced that it has secured new contracts/extensions, which included (i) drilling – one new contract from Chevron Corporation in Angola, and two contract extensions in Malaysia from Sarawak Shell Berhad / Sabah Shell Petroleum and Petronas Carigali, and (ii) engineering & construction (E&C) – two new contracts from Petronas and Hess Exploration and Production Malaysia (refer table below for the detailed breakdown of all contracts / extensions awarded). Combined, these contracts are valued at approximately RM760m.

Positive on the contract wins. Overall, we are positive on the contract wins and extensions as it not only highlights the company’s competitiveness and job winning abilities, but also signifies its jobs execution quality to warrant the contract extensions. In fact, Angola (Africa) represents an entirely new market for its drilling segment, with all of its rigs currently operating in Southeast Asia. Meanwhile, these contracts have brought YTD wins to roughly c.RM9b (in line with our order-book replenishment assumption of RM9b), and lifted order-book to an estimated RM19b – its highest in over two years. We expect EBIT margins for the E&C contracts to be within 10-20%, but still its drilling segment is seen to continue making losses. The new contract is also expected to lift its drilling utilisation to 8 rigs (from 7 rigs as at end- 3Q19), with another 8 rigs still being stacked.

New broom sweeps clean. Moving forward, SAPNRG is poised to start anew from FY20 onwards after the injection of fresh capital of RM4b from its capital raising efforts (consisting of rights issue with warrants and RCPS-i), which is expected to be concluded by end-Jan, while its 50% divestment of its E&P arm to OMV to raise up to c.USD800m is also targeted to be concluded by 1QFY20. All-in, this is expected to improve the company’s net-gearing to c.0.7x, from 1.7x as at end-3Q19. The improved post-FY20 outlook is further backed by the company’s display of healthy job flows recovery of late, which will only be further strengthened by its improved balance sheet and increased working capitals.

Upgrade to OUTPERFORM. With the overhang of its rights issue close to being cleared, we are turning increasingly bullish on the counter, underpinned by its (i) strong display of job flows recently, further backed by (ii) its improved balance sheet post-capital injection. Our TP remains unchanged at RM0.34 (implying 19% upside), pegged to 0.4x PBV – which is still over -1.5SD below its historical average PBV valuations. With that said, we see a more attractive entry opportunity to be after Jan-2019, once its rights issue has been fully completed. No changes were made to our FY19-20E numbers.

Risks to our call include: (i) better-than-expected margins, (ii) slower- than-anticipated job wins, (iii) failures in job execution, and (iii) falling through of sale of E&P arm.

Source: Kenanga Research - 08 Jan 2019