This article first appeared in The Edge Financial Daily on February 8, 2019
Sapura Energy Bhd
(Feb 7, 26.5 sen)
Maintain hold with an unchanged fair value (FV) of 30 sen. We maintain our “hold” call on Sapura Energy (Sapura) with unchanged forecasts and FV of 30 sen per share, based on a 60% discount to our estimated diluted book value of 72 sen per share, following the completion of its RM4 billion rights issue.
Upstream reported that Petronas is expected to delay or even abort its Kasawari project on Block SK 316 off Sarawak due to Sarawak attempting to extract additional financial benefits from the federal government.
In 2Q18, Petronas invited Malaysia Marine & Heavy Engineering Holdings and Sapura to bid for the engineering, procurement, construction, installation and commissioning contract for Kasawari’s Central Processing Platform.
Consultant Wood Mackenzie had earlier expected that Petronas could reach final investment decision on Kasawari in mid-2020 with production commencing in mid-2025.
With an estimated three trillion cu ft of recoverable gas reserves albeit with high carbon dioxide content between 30% and 40%, the Kasawari field is located in an environmentally sensitive marine area. The SK 316 block also contains the producing NC3 field that supplies feedstock gas to Train 9 at Petronas’ LNG complex at Bintulu and includes over five other gas discoveries which are under development and likely to start in 2022.
Malaysia’s near-term oil and gas order rollouts are likely to be unexciting, given the current volatility in oil price trajectory amid competition in Sabah and Sarawak for higher financial compensation for production fields within their territories.
Hence, brighter order prospects currently stems from overseas, principally in the Middle-East, Brazil, Gulf of Mexico and West Africa.
Selected as one of Saudi Aramco’s four new long-term agreement programme contractors late last year, substantive order book expansions are still likely from Sapura’s current tender book of US$8.5 billion (RM34.59 billion) and prospective bids of US$14.3 billion.
This is highlighted in Sapura’s new orders worth RM9.3 billion for financial year 2019 (FY19) to date, which translate into 2.3 times the RM2.8 billion jobs clinched in FY18 and an outstanding order book of RM17.7 billion — three times FY20F revenues.
Together with the completion of the sale of a 50% equity stake in Sapura Upstream to Austria-based OMV Aktiengesellschaft for an enterprise value of US$1.6 billion, we expect Sapura’s net profit to surge by 2.2 times for FY20F and 46% for FY21F from substantive cuts in interest costs, partly offset by the upstream earnings deconsolidation.
Additionally, this will cut the group’s FY20F net gearing from 1.7 times to a comfortable 0.5 times.
Notwithstanding its improving earnings outlook, the stock currently trades at ex price to book value of 0.4 times due to medium-term concerns over its undersubscribed rights share overhang. — AmInvestment Bank, Feb 7