Sapura Energy on stronger footing by year end after RM4b cash call

UOB Kay Hian Research kept a

KUALA LUMPUR: CIMB Equities Research views the RM4bil capital raising exercise as necessary medicine for Sapura Energy to get back on its feet and be able to take advantage of the nascent upturn in oil and gas capex spending.

It said on Monday its ex-rights sum-of-parts based target price of 53 sen was already higher than the current share price of 41.5 sen.

“We advise investors to accumulate now and buy even more on dips to ride the cyclical O&G capex recovery, the Sapura E&P listing and Sapura Drilling tie-up,” it said.

Last Friday, Sapura Energy proposed a renounceable rights issue of 10 billion shares at 30 sen each to raise RM3bil and an Islamic Redeemable Convertible Preference Share (RCPS-i) issue of 2.4bil units at 41 sen each to raise RM1bil. 

The rights also come with free out-of-the-money warrants. The principal shareholder, Tan Sri Shahril Shamsuddin, has committed to contribute at least RM300mil of his RM669mil entitlement under the capital raising exercise.

“If Shahril only invests RM300mil into the rights issue, his 16.8% stake in Sapura Energy may be diluted to 12.6%. 

“Conversely, Permodalan Nasional Bhd (PNB) has committed to its full entitlement and to buy even more subject to an undisclosed maximum while the remaining issues that have not secured explicit shareholder undertaking will be underwritten by investment banks. 

“As a result, PNB’s stake in Sapura Energy may rise to above its current 12% and it could become the single-largest shareholder in Sapura Energy,” it said.

To recap, last Friday Sapura Energy saw a massive selldown of its shares after the company announced a cash call to raise up to RM4bil to support its future growth strategy. The stock closed 18 sen down or 30.25% to 41.5 sen, wiping out a total of RM1.1bil in market value. 

However, CIMB Research said the capital raising exercise will most likely succeed in raising RM4bil by December 2018, which will be used to partially pay down its RM16.5bil borrowings, reducing its net gearing level from 1.61 times to 0.84 times. 

As Sapura Energy has currently fully utilised its existing borrowing headroom, the lower debt levels will allow it to borrow for working capital purposes, e.g. for bid and performance bonds on up to US$17.6bil of actual and prospective bids in the foreseeable future.

“A planned listing of its wholly-owned energy arm, Sapura E&P, can potentially reduce net
gearing further to 0.6 times, in our estimate. 

“Sapura Energy is targeting to list Sapura E&P by Dec 2018F, most likely on the Australian Stock Exchange, where vetting comes after the listing, accelerating the process, and where IPO valuations may be higher than in Malaysia given a larger pool of investors who are familiar with the oil and gas industry.

“Sapura Energy is also working towards a possible “strategic partnership” for its tender-drilling rig (TDR) business, which may take the form of a merger between two drilling companies that does not involve any cash or a partial stake sale of Sapura Drilling to another company.

“The primary motive is to secure added competencies and assets in the drilling space and to diversify away from its sole dependence on its 15-strong TDR fleet, which currently only has enough contracts for c.30% utilisation in FY19F,” it said.
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