Macquarie Equities Research (MQ Research) published a report on Sapura Energy Berhad (SAPE) on Saturday (28 July), discussing SAPE’s potential listing (IPO) of its exploration and production (E&P) business. While the market continues to be sceptical, MQ Research believes that the IPO will happen in 6 to 12 months as it will contribute to SAPE’s debt reduction, cutting its net debt by RM1.8bn to RM4.2bn. MQ Research maintains an “Outperform rating” on SAPE.

Conclusion

• Interest savings boost to earnings per share (EPS): The IPO alone is expected to cut net debt by RM1.8bn/RM4.2bn, for MQ Research’s low/high case. Estimated annual interest savings are RM90m/RM210m or +1.5sen/+3.5sen to EPS.

• Target price (TP) sensitivity: For every -10% to E&P’s IPO enterprise value, there will be a -7% impact to MQ Research’s TP of RM1.00. But even in MQ Research’s ‘low case’ listing EV of RM5.5bn, the adjusted TP is RM0.73, which boasts 20% upside.

• Better footing for E&C: MQ Research is upbeat on offshore upstream and believe SAPE with a strong balance sheet will be in a better position to secure more engineering & construction (E&C) orderbook wins (year to date wins: RM4.5bn vs MQ Research’s RM5.5bn target).

What to Expect

• IPO: MQ Research believes the E&P business will list in 6-12 months. Domestic appetite for the listing could be constrained; however, SAPE is mitigating this risk – reportedly seeking foreign listing jurisdictions like Australia. MQ Research also expects SAPE to deconsolidate the E&P arm along with debts. In addition to higher debt reduction, relinquishing management control of the to-be-listed segment will address corporate governance criticism that have been levelled at SAPE.

• Perpetuals>rights: MQ Research is negative on the prospect of a cash call, and while foreseeably challenging to execute, MQ Research does not rule it out. Conversely, MQ Research sees perpetuals as a better alternative, as there is more room for the banks to get involved with the debt restructuring.

• Status quo remains: The debt covenants binding Shahril means he stays on as CEO and as a 16% shareholder. While the covenants are new to the market, they are reportedly known to institutional shareholders.

Earnings and Target Price Revision

• No change.

Price Catalyst

• 12-month price target: RM1.00 based on a Sum of Parts methodology.
• Catalyst: successful listing of E&P arm.

Action and Recommendation

• Maintain Outperform. The market continues to be sceptical of the E&P listing, while MQ Research believes this re-rating catalyst will materialise. MQ Research’s bull and bear case valuations are RM0.24 and RM1.93.

Source: Macquarie Research - 30 Jul 2018