INVESTMENT HIGHLIGHTS

• Sapura Energy obtains firm support for RM4.0b rights issue

• PNB to emerge as largest single shareholder post-rights issue

• Capital injection provides opportunity for growth

• RM815m worth of new contract wins

• Maintain Trading Buy with unchanged TP of RM1.01

Firm support for RM4.0b rights issue. Sapura Energy Berhad (SEB) announced that it has obtained firm support from its major shareholders i.e PNB and its associated funds (PNB) as well as; Sapura Technology Sdn Bhd (STSB) to subscribed to the RM4.0b rights issues announced late last month. The firm support is received via the means of letters of irrevocable undertaking for their proposed issuance of rights shares with free warrants and rights issue of Islamic redeemable convertible preference shares (RCPS-i).

PNB to emerge as largest single shareholder post-rights issue. Post-issue, PNB is expected to emerge as the largest single shareholder of SEB by holding 40% of the post-rights issue enlarged share capital. According to the irrevocable letter of undertaking, PNB will subscribe to its full entitlement of rights shares with warrants and excess shares with warrants not taken up of RM3.0b. In addition, PNB will also fully subscribe to the RM1.0b RCPS-i. Meanwhile, STSB will subscribe to the minimum of RM300m as announced earlier.

Capital injection provides opportunity for growth. With the rights issue fully-subscribed, we opine that the capital injection will enable SEB to bid for higher-value contracts in key regions which will bring value-added earnings growth for the company.

RM815m worth of new contract wins. Sapura has also announced that it has won three new contracts under Engineering and Construction (E&C) in Malaysia, Australia and Nigeria as well as; extended its contract for provision of semi-submersible tender assist drilling rig for Brunei Shell Petroleum Co. These four contracts are worth RM815m in total which brings SEB’s new contract wins for the year to approximately RM5.3b which is within our orderbook replenishment expectations.

Orderbook. With the addition of the new contract wins, SEB’s total orderbook now amounts to RM17.5b. Out of these, approximately RM5.8b and RM3.3b are expected to be recognised in CY18 and CY19 respectively.

No changes to earnings. No change to our earnings estimates pending the results announcement due this week.

Maintain Trading Buy. Year-to-date, Sapura Energy’s share price has declined by approximately -65%ytd. This is despite stable crude oil prices in the tight range of USD70-80pb. 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 TP of RM1.01 per share.

Source: MIDF Research - 26 Sept 2018