Last week, SAPNRG announced five new contract wins worth RM1.3b. We are positive on the contracts, which are the first wins for the FY, highlighting the company’s competencies, and lifting its order-book to a three-year high of ~RM18b. Overall, having completed its recapitalisation exercise, we believe a turnaround is due for SAPNRG. Being our tactical top-pick for the quarter as a laggard play with limited downsides, we reiterate OP and TP of RM0.43.

New wins worth RM1.3b. Last week, SAPNRG announced its first new contract wins for the financial year, amounting to RM1.3b. The new wins include: (i) two local drilling contracts, and (ii) three engineering and construction (E&C) contracts from overseas (refer to table below for more detailed breakdown of contracts awarded).

Positive on the new wins. We are positive on the new contract wins, highlighting the company’s competitiveness and job winning abilities. In fact, its subsea pipelines installation contract in the Gulf of Suez represents the company’s first foray into Egypt, while its first contract from The Royal Australian Navy – a Submarine Rescue Service Contract to design and fabricate a remotely operated vehicle, underlined the company’s technological and engineering competencies. Overall, these new wins are expected to lift the company’s order-book to a three-year high of ~RM18b, although its drilling utilisation would remain unchanged at around 6 out of 16 rigs from end-FY19 (with another additional one rig scheduled to commence in 2Q FY20) as the new drilling contracts are for rigs already utilised currently (i.e. extension / replacement contracts)

Improved outlook. Having completed its recapitalisation exercise, we believe the worst should be over for SAPNRG, underpinned by its cleaned-up balance-sheet (net-gearing of 0.6x), three-year high secured order-book (~RM18b), and job execution competencies. Moving forward, with its tender-book of ~USD11b, more than half of which is from the Middle-east and Africa, we expect more contract wins to continue throughout the year. Post-contract awards, we made no changes to our FY20-21E numbers as the new wins are still within our order-book replenishment assumption of RM5b (versus FY19A wins of RM9.3b). We are forecasting a turnaround in FY20, especially in the 2H of the year, driven by: (i) interest costs savings from borrowings repayment following its recapitalisation, (ii) lower depreciation costs following impairments of RM1.5b in FY19, and (iii) several fabrication jobs load-out in the 2Q-3Q.

Reiterate OUTPERFORM, with an unchanged TP of RM0.43, pegged to 0.5x PBV. SAPNRG is our tactical top-pick for the quarter within the oil and gas sector, being a laggard play with limited downside, as well as capitalising on its turnaround story. Further catalysts may come from successful earnings delivery as well as further contract wins.

Risks to our call include: (i) poorer-than-expected margins, (ii) lowerthan-expected order-book replenishment, (iii) failures in job executions.

Source: Kenanga Research - 15 Apr 2019