• Keep SELL and MYR0.02 TP, 60% downside. Sapura Energy is expected to record a one-off gain of USD1.8m from its disposal of three rigs. We are generally positive on this, as the monetisation of non-core assets as proceeds will be used to fund working capital. That said, we reiterate our SELL call, as holistic debt and equity restructuring – which would be highly dilutive, in our view – is needed for Sapura Energy to be out of the woods.

• Proposed disposal of three rigs. Sapura Energy has entered into a memorandum of agreement to dispose three tender assisted drilling rigs – Sapura T-19, Sapura T-20 and Sapura Setia with ages ranging from eight to 17 years – for a cash consideration of USD8.2m (c. MYR35.1m) to NKD Maritime. The buyer is a UK-based cash buying company, predominantly involved in recycling steel business in India, Pakistan and Bangladesh. The transaction is expected to be completed within two months, subject to shareholder approval.

• Proceeds used as working capital. According to the announcement, the price tag was arrived at based on USD305/tonne, which is in line with market steel prices under a demolition evaluation. Proceeds will be used for working capital purposes. Note that these rigs have been cold-stacked and book value is also relatively low, following sizeable impairments made in prior years. We are generally positive on this, as the monetisation of non-core assets should continue to strengthen its balance sheet. Post disposal, Sapura Energy will be left with 11 rigs, of which 10 will be operational by end-FY23.

• Earnings impact. While the disposal will result in a one-off disposal gain of USD1.8m, the further impact on earnings should be rather minimal – given that the depreciation and opex savings are quite insignificant. As such, we make no change to our estimates.

• SELL. Our SOP-based TP remains 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 - 22 Aug 2022