Highlights

We recently met Scomi Energy for an update. The company remain busy on the execution of its huge RM5.1 bn orderbook with US$700m job from Petronas just commenced. Currently, the company has presence on 34 rigs out of total estimated 119 rigs in Malaysia, Indonesia, Thailand and Myanmar (Refer Fig 1), which suggests more market share to grab. Latest orderbook stood at RM5.1bn (which will sustain earnings growth for the next 3 years) with sufficient capacity and working capital to add another RM2.5bn contracts. SES is eyeing some RM1bn worth of contracts in South East Asia region as well as in Turkmenistan. In near term, chances to get US$40m drilling fluid contract from Myanmar looks promising.

We understand that the company is also involved in the bidding for the 3rd round of RSC. Channel check indicates SES is a front runner. However, we conservatively do not include the potential award in our forecasts. A potential marginal field win will conservatively raise our TP to range from RM1.02 to RM1.14 based on 0-50% debt to equity ratio funded (vs normal norm of 70% debt to equity ratio).

On the OSV segment, the company plan to build 3 accommodation barges instead of 2 previously given increasing demand from maintenance job on aging platform. Two of the vessels are expected to build from Korea shipyard with one to be delivered in 2H14 and another in 1Q15. The new barges are expected to fetch higher daily charter rate of US$23-25k as compared to current rate of US$21k.

DWM will be the main booster for long term growth as legislation is trending towards zero discharge as adopted in Caspian and North Sea. The market size for Eastern Hemisphere (excluding North Central & South America) is estimated at US$3.4bn in 2013 and expects to grow at CAGR of 8% to US$5bn in 2018. We understand that the company is in the vanguard of the development of Microwave technology for the treatment of oil contaminated drill cuttings. The commercialization of this product in 2014 might be the game changer and new growth driver for the company.

The impending UMW’s IPO (BUY) in Nov 13 could drive sentiment and serve as a potential re-rating catalyst for drilling related stocks. We do not rule out the possibility of high UMW O&G IPO valuations (~20x FY14 PER) driving up the P/E multiple of drilling related stocks.

Forecasts

Maintained. 2QFY14 result will be released in mid of Nov 13 and expected to be inline.

Catalysts

• Potential to secure RM400m worth of contracts on top of its already huge orderbook of RM5.1bn.
• Contract win in DWM business given the potential addressable market size of US$3.4bn.
• A marginal field contract win.
• Potential merger and acquisition with other O&G services provider to create synergy.

Risks

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

Valuation

We maintained our BUY call with an unchanged TP of RM0.90 (based on unchanged 16x FY03/15 EPS of 5.6 sen/share).

Source: Hong Leong Investment Bank Research - 22 Oct 2013