Friday 29 Mar 2024
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This article first appeared in The Edge Financial Daily on November 13, 2018

Sapura Energy Bhd
(Nov 12, 38 sen)
Maintain buy with an unchanged fair value of 55 sen per share:
We attended an analyst briefing last Friday following Sapura Energy Bhd’s signing of subscription and shareholders’ agreements to dispose of a 50% equity stake in Sapura Upstream to Austria-based OMV Aktiengesellschaft (OMV) for an enterprise value of US$1.6 billion (RM6.7 billion).

 

An initial 91% or US$890 million of the US$975 million cash proceeds will be paid after the sale is completed in the first quarter of financial year 2020 (1QFY20), with US$55 million likely secured over the next three to four years after reaching a final investment decision for the group’s block 30 in the Sureste basin off Mexico, and the remaining US$30 million for the brent oil price differential between 2019 and 2022.

Inclusive of US$500 million dividends to date, the sale pegs Sapura Upstream’s valuation at 2.3 times of the US$896 million cost paid to Newfield in February 2014. Management’s estimate of the exceptional gain of US$649 million (RM2.7 billion), translating to 35 times of FY20 net profit, excludes the remaining proceeds of US$85 million to be paid over the next three years and almost equal to FY21 earnings.

The special purpose vehicle Sapura OMV and OMV will focus on their core geographical regions as they operate in largely exclusive territories, except Australia and New Zealand. Sapura and OMV will individually have three board members on Sapura OMV, with Sapura holding the chairman and chief executive officer roles and OMV the deputy chairman and chief financial officer positions.

Together with the group’s RM4 billion rights issue, we estimate Sapura’s net profit will surge 2.2 times for FY20 and 46% for FY21 from substantive cuts in interest costs, partly offset by the upstream earnings deconsolidation. Additionally, this will cut the group’s FY20 net gearing from 1.7 times to a comfortable 0.5 times, lower than our earlier estimate of 0.7 times due to the book value boost from the exceptional disposal gain.

Assuming Sapura sells a 50% stake in its drilling assets based on its book value of RM6.4 billion as at Jan 31, 2018, we estimate that the gearing could drop even further to 0.3 times while improving earnings to 2.3 times for FY20 and 60% for FY21, which will support a rising momentum in engineering, procurement, construction, installation and commissioning jobs underpinned by orders of RM5.3 billion already secured this year, reaching 82% of our FY19 assumption.

Besides an improved balance sheet, we remain positive about this mutually beneficial strategic partnership expanding Sapura’s portfolio and facilitating synergies in the upstream value chain through sharing technology, the development of Sapura’s local talents and risk mitigation in exploration and production activities, while opening up new market opportunities for its engineering and construction services in OMV’s offshore activities globally. — AmInvestment Bank, Nov 12

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