Results

Above Expectation: 1HFY14 Core profit registered RM49m, making up 55% and 49% of HLIB and consensus full-year estimates, respectively.

Deviations

Better than expected margin assumptions on oilfield services.

Highlights

QoQ, 2QFY14 Core profit increased 7% qoq mainly due to oilfield business recording higher revenue from Indonesia with the commencement of new contract and increased drilling activities from West Africa.

Marine services fell QoQ due to lower tonnage transported during the current quarter as lower coal prices in Indonesia has affected production output. QOQ EBIT margin fell from 12.2% to 11.5% due to initial ramp up cost for projects which have yet to register any contribution.

The company expects to secure several job orders in the South East Asia region as well as in Turkmenistan in the short term to add to outstanding orderbook of RM5.1bn currently. 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.

SES is trading at 13x CY 14 P/E versus UMW Oil and Gas at 24x CY 14 P/E. We expect high UMW O&G valuation driving up the P/E multiple of drilling related stocks such as SES.

Forecasts

Unchanged pending analyst briefing later today.

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$2.1bn.
• 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 5.6sen/share).

Source: Hong Leong Investment Bank Research - 19 Nov 2013