Highlights

Scomi Energy (SES) share price has performed very well, hits our target price of RM0.88 last Friday and prompted us to downgrade the stock to HOLD within a month. However, we noticed its parent company, Scomi Group has significantly lagged behind in term of share price performance since our initiation of SES on 4 June 2013.

Scomi Group controls 66% stake in SES (Hold) and 72% stake in Scomi Engineering (Not Rated). Scomi Group is trading at a discount to our simple sum-of part (SOP) estimate of RM0.77. At current price, it is at a 46% discount to its SOP valuation. (Refer Fig 2).

We deemed the huge discount unjustified as Scomi Group controls 66% stake in SES with 90% of Scomi Group EBIT contributed by SES.

We like SES as it is one of the top pick in the drilling sector given the huge prospect from drilling fluid (DF) and drilling waste management business (DWM), but the recent strong share price performance has run ahead fundamental in short run. Hence, Scomi Group provides investors a cheaper proxy to SES.

Based on our sensitivity analysis, every 5% changes in SES share price will translated to 4.5% changes in Scomi Group SOP valuation. The high correlation is mainly due to SES’s value has contributed to ~90% of the Scomi Group SOP.

According to the filing from Bursa announcement, CEO Shah Hakim has been accumulating Scomi Group shares (range from RM0.35-RM0.45) in open market recently. This shows management confidence on the company prospect.

Catalysts

• Significantly cheaper proxy to SES at 46% discount to SOP.
• Turnaround in it’s engineering arm (under Scomi Engineering).
• Contract wins in DWM business (under SES) given the potential addressable market size of US$2.1bn.

Risks

• Project delays in Scomi Engineering.
• Global recession hitting O&G price;

Forecasts

Not Applicable.

Valuation

Assuming a simple SOP calculation and a 30% holding company discount, the company should worth RM0.54. Note that our SOP is based on our target price of RM0.88 for Scomi Energy while Scomi Engineering is based on current market price.

Source: Hong Leong Investment Bank Research - 9 Jul 2013