This article first appeared in The Edge Financial Daily on March 18, 2019
Sapura Energy Bhd
(March 15, 36.5 sen)
Upgrade to buy from hold with a higher fair value (FV) of 50 sen: Sapura Energy Bhd’s (Sapura) FV of 50 sen, from an earlier 30 sen, is based on a lower 30% discount to our estimated diluted book value of 72 sen per share, following the completion of its RM4 billion rights issue.
Our earlier concerns on the 18.5% under subscription or 1.8 billion ordinary shares out of the RM3 billion rights shares issued at 30 sen per share on a five-for-three basis have been alleviated as the underwriters Maybank Investment Bank, CIMB Investment Bank and RHB Investment Bank have completely disposed of the shares without causing any significant price swings.
Also, we have become more confident of Sapura’s improving earnings prospects which currently stem 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 (about RM34.77 billion.) with prospective bids of US$14.3 billion (about RM58.5 billion).
These are 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 FY20 forecast revenues.
In January this year, Sapura secured three rig drilling charters and two offshore jobs worth RM760 million that include carrying out the engineering, procurement, construction and commissioning works related to relocating and tying in Petronas floating LNG Satu from the Kanowit field to the Kebabangan cluster off Sabah, with completion expected in the third quarter of financial year 2020 (3QFY20).
The group’s yard’s utilisation is expected to surge 5.8 times from 5,000 tonnes in 2018 to 29,000 tonnes in 2019 and subsequently accelerate further by 28% to 37,000 tonnes in 2020, driven by the progress completion of the Pegaga and ONGC’s KG-DWN- 98/2 central processing platform projects, coupled with the three wellhead platforms for the Sapura-OMV’s Gorek, Bakong and Larak wellhead platforms. Our only concern is the group’s drilling division as its rig utilisation rate of below 50% currently will continue to drag the group’s overall improving earnings prospects.
Together with the completion of the sale of a 50% equity stake in Sapura Upstream to Austria-based OMV Aktiengesellschaft (OMV) for an enterprise value of US$1.6 billion (about RM6.5 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. — AmInvestment Bank, March 15