INVESTMENT HIGHLIGHTS

• Sapura Energy proposed rights issue and RCPS-i

• Exercise to raise approximately RM4b

• Sole purpose to reduce debts, gearing and interest costs

• Company business prospects remain intact

• Current orderbook at approximately RM16.7b

• Maintain TRADING BUY at unchanged TP of RM1.01

Corporate exercise. Sapura Energy Bhd announced corporate exercise involving two main undertakings: (i) 5-for-3 rights issue of up to 9.987b new shares and; (ii) 2-for-5 rights issue of up to 2.397b RCPS-i. The rights issue for the new share will have an issue price of RM0.30 per share while the implied conversion price of the RCPS-i is RM0.41 per share.

Purpose of corporate exercise. The main purpose of these corporate exercises is to raise approximately RM4b to reduce the group’s hefty borrowing of RM16.55b or 1.6x net gearing. Post debt reduction, the net gearing level is expected to be around 1.2x. In addition, this significant reduction in borrowings will also cause savings of around RM190m per year in interest costs.

Orderbook. Group orderbook is currently at RM16.7b, marking an inflection from FY18 low for the past four years. Out of these, approximately RM5.2b and RM3.8b are expected to be recognised in FY19 and FY20 respectively, while the remaining RM7.7b is to be recognised in FY21 onwards. The company’s bidbook, including prospects is at USD13.1b.

Forward earnings expected to improve. Should these corporate undertakings materialise in its entirety, we expect the company’s forward earnings to improve substantially – in particular from interest savings. Therefore, for FY19F in particular, we are expecting the group to return to the black. The chunk of the group earnings will stem from the upbeat offshore activity levels of the E&C segment and sustainably higher crude oil prices of the E&P segment.

Changes no earnings. We make no changes to our earnings estimates pending the take-up rate and further progress of these exercises.

Maintain Trading Buy. Year-to-date, Sapura Energy’s share price has declined substantially. This is despite stable crude oil prices in the tight range of USD70pb. We are of the opinion that the current broad-market sell off presents trading opportunities for investors seeking exposure in oil and gas service providers with direct upstream exposure. Although we acknowledge that Sapura Energy’s profitability might still be weak due to its other underperforming segment, we believe that the share offers short term trading opportunities for investors. As such, we are maintaining our Trading Buy call on Sapura Energy with an unchanged target price of RM1.01 per share.

Source: MIDF Research - 27 Aug 2018