Results

In line: 1H13 Core profit registered RM48m, making up 50% and 48% of HLIB and consensus full-year estimates, respectively.

Deviations

None.

Dividends

None.

Highlights

Revenue flat YoY due to the bareboat charter model. In the meantime, the company received notice on end of charter of E3 from TL Offshore. This comes as surprise as market expects the contract to extend until Dec 2013. We gather from management the E3 contract now will effectively end in early or mid of Sept 13. We are not overly concern on the end of the E3 contract as the company just completed the corporate exercise with Ezra (on 21 Aug 13) resulted in a 50% swap of E3 for a 51% stake in FPSO Lewek Arunothai, we expect 4 month revenue contribution (from Sep to Dec 13) from this FPSO to make up the loss in revenue from E3 (FPSO - RM14m vs. E3 - RM7m). In addition, the partnership with Ezra is expected to enhance the potential of rechartering E-3 to other clients. We understand the company is actively pursuing new contract in Malaysia and in the region. The burn rate for E3 is around RM1m per month.

Another concern is MOPU extension as the current contract will end on 30 Sep 2013. As we understand, the Bekok production platform is still under refurbishment. In the event that the MOPU is not extended, the 6 months idle period has RM12m burn rate. The negative impact to FY13 and FY14 net profit would be RM13m and RM18m. Our target price will reduced to RM1.73, which still provides 17% upside from current level. Growth is set to continue with the delivery of an FPSO in 2013, a pacific class 400m jack up rig in mid-2014 and the option on an additional rig in mid-2015. The FPSO and new rig businesses are expected to contribute 47% and 67% of total earning in FY14 and FY15 respectively.

The impending UMW’s IPO in 2H13 could also drive sentiment and serve as a potential re-rating catalyst for drilling related stocks. We do not rule out the possibility of higher UMW O&G IPO valuations driving up the P/E multiple of drilling related stocks.

Risks

• Political risk.
• Execution risk.

Forecasts

Maintained.

Catalysts

• Securing drilling contracts before rig delivery.
• New contracts for E3 and MOPU.
• UMW’s IPO in 2H13 likely re-rate drilling related companies.

Valuation

We maintain our BUY call with an unchanged TP of RM2.00 based on unchanged 16x FY/14 EPS of 12.5 sen/share.

Source: Hong Leong Investment Bank Research - 23 Aug 2013