• Keep SELL and MYR0.02 TP, 56% downside. We are positive on the contract win as it provides a 2-year earnings visibility for the Sapura Esmeralda vessel, despite lower charter rates. The six pipe-laying support vessels (PLSVs) will continue to be among the main earnings contributors for Sapura Energy. That said, we reiterate our SELL call, as a holistic debt and equity restructuring – which would be highly dilutive, in our view – is needed for Sapura Energy to be out of the woods.

• 2-year contract extension for Sapura Esmeralda. Sapura Energy’s JV company has been awarded with a 2-year extension, valued at USD130m (c.MYR580m) by Petróleo Brasileiro SA (Petrobras) for the provision of services and charter of PLSV Sapura Esmeralda. The implied daily charter rates (DCR) of USD178k/day appears to be higher than the rates of Sapura Diamante and Sapura Topazio, which have been awarded 3.5-year contracts by Petrobras.

• Lower charter rates. Overall, we are positive on the contract win as it provides a 2-year earnings visibility for this vessel. Recall that Sapura Esmeralda was under an 8-year firm charter contract with another 8-year extension option. The original DCR was as high as USD250k/day. However, we understand that Petrobras has slashed the rates several times in the past few years. Therefore, we estimate that the new DCR is 10-15% lower than the most recent rates prior to the expiry of the firm contract. Subsequent to this new contract, the next PLSV that is due for expiry is Sapura Onix in 3QCY23, followed by Sapura Jade in 1QCY24.

• Maintain our estimates. Recall that all six vessels have operated in Brazil for Petrobras in 1QFY23 with average utilisation of 94.8%. The share of profit from these vessels was c.MYR40m in 1QFY23. Assuming net margin of 10%, this contract is likely to contribute net earnings of MYR15m pa. Despite the contract win, we maintain our losses estimates, with the anticipation of a continuous drag by other segments.

• SELL. Our SOP-based TP is kept at MYR0.02, assuming 20% of total debt was converted to equity, based on a conversion price of MYR0.10/share. Our share base is enlarged by 21.4bn or 1.2x. Our TP also includes a 6% discount, based on Sapura Energy’s ESG score of 2.7. Upside risks: Better- than-expected project execution and stronger-than-expected contract flows.

Source: RHB Research - 3 Aug 2022