This article first appeared in The Edge Financial Daily on August 28, 2018
KUALA LUMPUR: The selldown of Sapura Energy Bhd shares continued yesterday as investors reacted negatively to a proposed renounceable rights issue to raise up to RM4 billion designed to reduce its borrowings.
About RM1.1 billion of its market value was wiped off last Friday, as its share price fell 30.25% to close at 41.5 sen. Its shares continued to slide as much as 9.8% in early trade yesterday, before paring some losses to close at its all-time low of 37.5 sen, still down four sen or 9.64% from last Friday’s closing price.
A total of 348.89 million shares were traded and its market capitalisation stood at RM2.25 billion. The decline was in stark contrast to the gain seen in the FBM KLCI, which closed up 3.01 points or 0.17%, as well as the regional equity markets yesterday.
It was supposed to be a turnaround story for Sapura Energy as most analysts had given a “buy” call to the stock prior to last Friday's announcement of the massive rights issue, citing an increase in capital expenditure in the oil and gas (O&G) industry, the group’s strong order book profile and a potential listing of its exploration and production (E&P) arm.
A fund manager of a local asset management firm said the decline in Sapura Energy’s share price was expected given the massive impact from the cash call on existing shareholders.
“There will be a massive dilution of earnings with the corporate exercise, which intends to raise about RM4 billion. I think the negative sentiment [arising] from the corporate exercise will continue to weigh on Sapura Energy for a while,” he told The Edge Financial Daily.
“If you look at UMW Oil & Gas Corp Bhd’s (now known as Velesto Energy Bhd) massive rights issue in January 2017, the corporate exercise was also a huge overhang on its share price,” he said, noting that investors usually dislike cash calls that are designed to reduce borrowings.
He noted that the fundamentals, however, had not really changed for Sapura Energy.
“The ongoing recovery of the O&G industry is likely to continue over the next few years, with more activities expected. Sapura Energy is a big player in the global landscape. The potential reduction in its borrowings is actually a good thing, but investors that have to fork out the extras might feel that they have been penalised, especially with the controversies surrounding the massive salary given to its chief executive officer (Tan Sri Shahril Shamsuddin).
“But if you are looking for a strong O&G company with diversified exposure, it (Sapura Energy) is actually a good option. It might take a while, but its share price will recover if the management can deliver,” the fund manager said, adding that confidence in the management remains an issue at the moment.
Bloomberg data showed that seven out of 19 analysts covering Sapura Energy had downgraded their recommendation following the proposed rights issue.
One of them is Affin Hwang Investment Bank Bhd analyst Tan Jianyuan, who said in his report yesterday that the downgrade to a “sell” call was mainly due to massive dilution of earnings per share for shareholders, which is not value-accretive as a whole.
His target price (TP) for Sapura Energy was also lowered to 32 sen, from the previous TP of 65 sen.
Nevertheless, eight analysts covering Sapura Energy have maintained their “buy” recommendation despite the decline seen in its share price over the last two trading days.
Credit Suisse research analyst Danny Chan said in his report last Friday the rights issue exercise is expected to create value for the group moving forward as prospects for the sector continue to improve.
“While this highly dilutive exercise might seem negative on the surface, we believe it is necessary and will place Sapura Energy in a much better position to secure new higher-quality contracts (demand for services is clearly on an uptrend) in the sector’s upcycle. More importantly, this move will keep its bankers happy and would help boost Sapura Energy’s bankability in the future (it will require bid bonds or performance bonds, which are valued at about 2% to 10% of contract value),” Chan noted.
He also noted that the potential listing of the group’s E&P assets remains on track as the group intends to further strengthen its balance sheet to address a larger volume of work.