Sapura Energy Bhd (Sept 26, 43.5 sen)
Maintain buy with an unchanged fair value of 55 sen: We maintain our “buy” call on Sapura Energy Bhd with an unchanged fair value of 55 sen per share, based on a 25% discount to our estimated diluted book value of 73 sen per share, assuming ex-proposed rights issue of up to RM4 billion. This implies a 24% discount to our ex-sum-of-parts.
Permodalan Nasional Bhd (PNB) is set to become Sapura Energy’s largest shareholder with an equity stake of up to 40% (from 12% currently) following the completion of the group’s proposed renounceable rights issue of up to RM4 billion.
Recall this involves rights shares priced at 30 sen per share on a five-for-three basis with one free warrant for every 10 rights shares subscribed together with new Islamic redeemable convertible preference shares (RCPS) at 41 sen per RCPS to be allocated on a ratio of two RCPS-to-five shares. As this exceeds the mandatory takeover threshold of 33%, PNB is applying for an exemption to undertake a general offer for the remaining shares.
PNB has given an undertaking letter to Sapura Energy to subscribe for its rights entitlement and the excess shares and warrants not taken up by the other shareholders, up to an equity stake of 40% in the group. This could mean that PNB alone will be taking up to 57% of the rights share offering. Additionally, PNB will subscribe for the entire RM1 billion RCPS offering. Assuming full conversion at the end of the RCPS’ five-year maturity, PNB’s stake could rise further to 48%. However, we understand that Sapura Energy intends to fully redeem the RCPS before its maturity.
President and group chief executive officer Tan Sri Shahril Shamsuddin via Sapura Technology Sdn Bhd has also given an undertaking to subscribe for a miniumum rights entitlement of RM300 million. Maybank Investment Bank and Credit Suisse have given an undertaking to subscribe for the remaining RM1 billion rights shares not subscribed for by PNB or Shahril, which means that the proposed rights exercise is a “done deal”.
It is likely that PNB will increase its board representation in Sapura Energy from only one currently. However, Shahril will remain in his current position as the entrepreneur/founder who has built Sapura Energy into a regional oil and gas operator and service provider.
We are positive on this development as the entry of PNB will provide further corporate governance and oversight for the group.
Additionally, the rights combined with the divestment of half of Sapura Energy’s upstream division to OMV Aktiengesellschaft for an enterprise value of US$1.6 billion (RM6.62 billion) will halve Sapura Energy’s financial year 2019 forecast (FY19F) net debt to RM8 billion while net gearing drops from 1.6 times to 0.8 times. The lower gearing level will also free up working capital to support the rising momentum of engineering, procurement, construction, installation and commissioning jobs underpinned by the RM5.3 billion orders secured this year, reaching 82% of our FY19F assumption. — AmInvestment Bank, Sept 26
This article first appeared in The Edge Financial Daily, on Sept 27, 2018.