Sapura Energy (SapE) announced multiple proposals comprising of i) renounceable rights issue of up to 9,986,925,145 shares on the basis of 5 rights shares for every 3 SapE shares held, ii) free detachable warrants of up to 998,692,515 on the basis of 1 free warrant for every 10 rights shares subscribed, and iii) renounceable rights issue of up to 2,396,862,035 new Islamic Redeemable Convertible Preference Shares (RCPS-i) on the basis of 2 RCPS-i for every 5 SapE shares held. We are slightly surprised by this development as management had previously guided that it did not see the possibility of cash calls, though we think it was also inevitable due to its high debt levels amid current operating dynamics. Management has now reiterated the purpose of the proposal is to reduce borrowings so as to strengthen its balance sheet, enabling them to bid and undertake higher value projects globally. All said, this cash deal will dilute our SOP-derived TP to RM0.29 assuming full exercise of warrants, and RM0.25 upon full exercise of both RCPS-i and warrants. For the time being however, we are leaving our forecast and TP of RM0.81 unchanged pending completion of the exercise in 4QCY18 but caution for intense share price volatility and potentially further downside in the interim until clarity is seen in its longer term prospects. SapE’s share price fell 30.3% after the announcement last Friday, providing investors trading opportunities, hence our Trading Buy being maintained.
The proposals entail, i) proposed renounceable rights issue of up to 9,986,925,145 shares at an issue price of RM0.30/rights share on the basis of 5 rights shares for every 3 SapE shares held, ii) free detachable warrants up to 998,692,515 on the basis of 1 free warrant for every 10 rights shares subscribed, and iii) proposed renounceable rights issue of up to 2,396,862,035 new Islamic Redeemable Convertible Preference Shares (RCPS-i) at an issue price of RM0.41/RCPS-i on the basis of 2 RCPS-i for every 5 SapE shares held at an entitlement date to be determined later. The application to the relevant authorities is expected to be made within 2 months from this announcement while the proposals are expected to complete by 4QCY18. The Group’s major shareholder, Permodalan Nasional Bhd (PNB), which holds about 12% of Sapura Energy, has indicated via its letter dated 23 Aug that it would subscribe in full its entitlement as well as applying for excess that are not taken up.
Reformulating the growth strategy. The primary objective of the proposal is to reduce the borrowings of SapE, i.e. to strengthen its balance sheet. The stronger balance sheet would enable the Group to bid and undertake higher value projects globally. This also part of the Group’s growth strategy on its 3 core segments – E&P, drilling and E&C, to be operated and funded independently. In addition to these proposals, the listing of its E&P business and exploring a possible strategic partnership for its drilling business are others being considered.
Improving the numbers. The proposals are expected to raise gross proceeds of approx. RM3.98bn of which 100% of it (after deducting all expenses relating to the proposals est. ≈RM20.8m) will be used to pare down its debt. As of FYE18, the Group’s borrowing stood at RM16.4bn. It is expected to reduce to RM12.6bn after the issuance of rights and RCPS-i, and down further to RM12bn on full exercise of warrants. The repayment of borrowings would result in c.RM190m interest cost savings while reducing the gearing from 1.7x to 0.9x. The Group’s share base will increase from 5.99bn to 15.98bn shares after the rights issue with warrants and will expand further to 19.37bn shares upon conversion of both RCPS-i and free warrants however.
Our take. Although this development is a surprise as management had previously guided that it did not see possibilities of a cash call in the near term, this was likely an inevitability given its stretched balance sheet amid current operating dynamics. While highly dilutive to existing shareholders, we defer to management’s judgment and assessment on what is necessary for the Group to continue riding on the sector’s recovery. The oil and gas sector is clearly showing an uptrend in momentum, evident from the award of contracts as well as pick-up in tender activities. With improved balance sheet, we believe SapE will be in a good position to secure more valuable projects going forward. In the meantime however, this cash deal will dilute our SOP-derived TP to RM0.29 assuming full exercise of warrants, and RM0.25 upon full exercise of both RCPS-i and warrants. We are leaving our forecast and TP of RM0.81 unchanged pending completion of the exercise in 4QCY18 but caution for intense share price volatility and potentially further downside in the interim until clarity is seen in its longer term prospects.
Other updates. Sapura has successfully secured a total of RM4.5bn worth of contracts thus far – accounting for 75% of our FY19 orderbook replenishment target, pushing its balance order book in hand to RM16.7bn, which will keep them busy over the next three years. The Group’s tender book remains strong, growing from USD2.5bn in FY17 to USD7.4bn at present with additional prospects of USD10.2bn for this year. On the potential listing of its E&P segment, management is still reassessing the strategy and expects this to happen in the next 4 months. We gather the listing will either be in Malaysia or Australia.
Source: PublicInvest Research - 27 Aug 2018
https://klse.i3investor.com/blogs/PublicInvest/171282.jsp
