Results

Inline: 9MFY14 Core profit registered RM139m, making up 74% and 75% of HLIB and consensus full-year estimates, respectively.

Deviations

None.

Highlights

9MFY14, drilling services registered strong revenue of RM497m (94% of total revenue) attributed by full quarter revenue contribution from Naga 4, GAIT III and GAIT V, higher charter rate from Naga 2 but partly offset by low utilisation rate from Naga 3 when it underwent a scheduled underwater inspection in Sept 2013.

On oilfield service, higher revenue from inspection and repair services from operation in Turkmenistan and threading of premium connection in China is offset in part by lower threading revenue in Labuan which was caused by machine downtime.

The company expect drilling services revenue to improve further in 4QFY13 as all four rigs comprising Naga 1, Naga 2, Naga 3 and Naga 4 are expected to be operating almost full quarter.

Share price has appreciated 23% within 3 weeks since our initiation report titled “Asia-Pacific Rim in The Making” dated 10 October 2013 and exceeded our TP of RM3.36. As there is no change to the company underlying fundamental, share price has run ahead of fundamental in short run, hence, we advise investors to take some profit off the table and downgrade the stock from BUY to HOLD.

However, in long run, we still like the company as it is the only pure-rig related play with sizeable market cap which will benefit from the massive drilling activities in Malaysia and regionally.

Domestically, there is a shortage of locally owned rigs. As of Sept 2013, there are 16 jack-up rigs operating in Malaysia but only 2 are locally owned (Naga 3&4). Drilling into detail, 14 foreign jacks up rig contracts are expects to expire within 1-2 years with 3 in 2H2013, 4 in 1H2014, 5 in 2H2014 and 2 in 2015. Hence, we expect tender and contract award to accelerating in next 2 years with the early call for tender by end of 2013.

We have assume UMW O&G to acquire at least 2 more new rigs after IPO with net gearing remain manageable at 0.35x in FY14 which suggests more room for asset expansion.

Forecasts

Unchanged.

Risks

Global recession hitting O&G price; Technology advancement; relaxation of Petronas’ domestic Policy.

Rating

HOLD

Positives: Market leader in domestic drilling sector with strong balance sheet to expand further.

Negatives: Increased competition for the markets.

Valuation

We downgrade the stock from BUY to HOLD with unchanged TP of RM3.36 based on 20x average FY14-FY15 P/E (as the full contribution from Naga 5 and Naga 6 will only be reflected in FY15). We believe earnings need to catch up (which is only expected in FY15) for further price appreciation.

Source: Hong Leong Investment Bank Research - 19 Nov 2013