News

Scomi Energy (SES) has secured RM158.7m (2 years +1 year option) contract from Tenaga Nasional Bhd to transport coal for Tenaga’s electricity-generation operations.

The contract duration is 2 years with an optional one-year extension and will commencing from 1 September 2013.

Under the contract, SES is expected to transport approximately 3m metric tonnes of coal per year to and from various locations.

The award is expected to have a positive impact from FY03/14 onwards.

Comment

We are positive on the award, reinforce our view that coal barge business has bottomed out detailed in our initiation report dated 04 June 2013.

The contract won translates to RM53m per annum and increased the marine logistic revenue by 41% to RM182m in FY03/15. With EBIT margin assumption of 10%, this will add RM5.3m to the EBIT level.

Overall, the contract win raised our EPS forecast by 2-3% from FY03/14 to FY03/16.

Despite the small earning impact (~coal business contribute only 9% of total EBIT in FY03/15), the contract win improved utilisation rate of coal vessels from current level of 68% and eased investors’ concern on the potential deteriorating coal business. However, we believe the management will focus on the OSV segment which is synergistic to the drilling services business. The company intends to acquire 3 AHTS (BHP: 5- 6k) and 1 accommodation barge.

In the long run, we still like the company 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). We also like Perisai (BUY) and SapuraKencana (BUY) who are also proxies to the boon in drilling related activities.

DWM will be the main booster for long term growth as legislation is trending towards zero discharge as adopted in Caspian and North Sea. In North Sea, the DWM business size is 10-15% larger than DF. Margin for DWM is also more lucrative with gross profit margin of more than 30% vs. DF at 20-26%.

Forecast

EPS forecast raised by 2-3% from FY03/14 to FY03/16.

Catalysts

• Potential to secure RM400m worth of contracts on top of its already huge orderbook of RM5bn.
• Contract win in DWM business given the potential addressable market size of US$2.1bn.

Risks

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

Valuation

We maintain HOLD with TP raised from RM0.88 to RM0.90 based on 16x FY03/15 EPS of 5.6 sen/share.

Source: Hong Leong Investment Bank Research - 16 Jul 2013