Highlights

RM5bn orderbook!!!…After the acquisition of Scomi Oilfield (SOL) which was completed in Mar 2013, Scomi Energy Services Bhd’s (SES) is transforming to drilling fluid (DF) and drilling waste management (DWM) provider. Its orderbook has ballooned to RM5bn. This translates to 3.7x HLIB FY14 revenue projection and provides revenue visibility until 2017. The company is targeting to secure additional RM 400m worth of contracts, which will boast the orderbook to RM5.4bn by the end of 2013. In addition, the company is also eyeing a portion of the US$300m worth of mega contracts from Petronas, Shell and Exxon Mobile on drilling fluid by end of 2013. Another mega contract in the pipeline is the drilling fluid contract from Brunei which may involves 14 rigs in 1H14 which may be worth up to US$300m per annum.

Misperception by the market…The company’s orderbook/market cap stands at ~3.7x but the company only trades at 11x FY15/03 P/E as compared to peers that have huge orderbooks. We believe the current orderbook for SES is yet to accurately factor in the current oil and gas upcycle, further understating its potential upside. The market still views SES as a coal logistic provider and not a drilling related play.

Massive drilling activities planned…highest record of 38 rigs operating…The number of drilling rigs is set to increase as exploration of existing and Production Sharing Contracts (PSC) continues. In addition, developments bring marginal fields and new PSC discoveries into production will also require drilling. Based on industry channel checks, there will be 38 rigs operating in Malaysia by end 2013 vs 22 in 2012.

Low PEG ratio...Riding on the RM5bn orderbook on hand, SES s DF and DWM’s businesses are poised to grow by 22% and 32% in FY14 and FY15 respectively. SES is trading at 11x FY15/03 with 34% earning CAGR from FY2014-2016. This will translate to 0.3x FY15/03 PEG ratio. (Refer Fig 10 and 11 behind) We expect change in market appraisal on the stock to drive P/E expansion.

Catalysts

• Potential to secure RM400m worth of contracts on top of its already huge orderbook of RM5bn.
• On the most conservative calculations, a marginal field win could boost our TP to at least RM0.93 per share.

Risks

Global recession hitting O&G price; Technology advancement; Relaxing of drilling waste management regulations.

Rating

BUY (NEW)

Positives: Huge orderbook and increasing drilling activities provide earning growth sustainability.

Negatives: Increased competition for the markets and deteriorating in coal barges business.

Valuation

We initiate coverage on with a BUY call and a TP of RM0.88 based on 16x (vs. small cap O&G P/E multiple 14x) FY15/03 EPS of 0.055 sen/share. We use a higher P/E multiple to include the chance of winning a marginal field.

Source: Hong Leong Investment Bank Research - 04 Jun 2013