We have maintained our “buy” call on Sapura Energy Bhd, with an unchanged FV of 55 sen a share, based on a 25% discount to our estimated diluted book value of 73 sen a share, assuming an ex-proposed rights issue of up to RM4 billion. This implies a 24% discount to our ex-sum-of-parts valuation.

Sapura’s FV is unchanged as we have maintained our financial year 2019 forecast (FY19F) earnings given that the group’s first nine months of FY19 loss of RM293 million was within our expectations, albeit worse than the consensus loss of RM222 million. Excluding an unrealised foreign exchange  gain of RM96 million, Sapura’s core loss of RM389 million was well within our FY19F loss of RM547 million, with the group expected to suffer a wider fourth quarter of FY19 (4QFY19) loss due to seasonally lower offshore activities during the monsoon season.

However, given that Sapura has secured a US$353 million (RM1.5 billion) contract to build Oil and Natural Gas Corp Ltd’s Offshore Process Platform (the central processing platform and living quarters) project for the KG-DWN-98/2 NELP block, as indicated in our past reports, the group’s new FY19F contract wins have surged by 21% to RM8.5 billion to date, well ahead of our order book intake assumption of RM6 billion.

With more contracts to be announced soon, we have raised our FY19F-FY21F new order book assumptions by 25%-50% to RM9 billion-RM10 billion, which have raised FY20F-FY21F earnings by 16%-42% in view of the engineering, procurement, construction and installation profit recognition cycle.

The new jobs have increased Sapura’s outstanding order book by 10% quarter-on-quarter (q-o-q) to RM16.9 billion — 2.8 times revised FY20F revenue. As the group was recently selected as one of Saudi Aramco’s four new long-term agreement programme contractors for a six-year firm period (excluding two optional extensions of three years), we expect substantive expansion from its current tender book of US$8.5 billion and prospective bids of US$14.3 billion.

Sapura’s 3QFY19 loss narrowed by 75% quarter-on-quarter (q-o-q) to RM31 million, mainly due to higher utilisation of its construction vessels, which drove engineering and construction revenue by 23% q-o-q and cost optimisation in the drilling segment which cut its losses by 80% to only RM12 million. This was further improved by the exploration and production division’s 33% q-o-q pre-tax profit increase to RM37 million, underpinned by the US$2 a barrel increase in crude oil prices to US$79 a barrel amid a flat output of 1.1 million barrels.