Highlights

Scomi Energy (SES)’s 2QFY14 analyst briefing was hosted by Shah Hakim Zain, Group CEO and attended by around 10 fund managers and analysts. As guided in previous quarter, gross margin fell from 26% in 1QFY14 to 23% in 2QFY14 due to initial ramp up cost for projects which have yet to register any contribution. Drilling revenue in Malaysia has slow down due to delay in commencing some of the drilling programme and higher mix of lower margin products, however the shortfall has offset by strong regional drilling activities such as Indonesia, Thailand, Russia and West Africa. Outlook for Marine Services remain sluggish due to: i) less coal tonnage carries due to dispute between customer Arutmin and its mining contractor as well as low coal prices; and ii) lower OSVs revenue due to vessels in between projects and off-hire for maintenance.

The company continue to expand its product range into high margin drilling fluid, completion services, sub-surface studies and wireline services via partnership. We are also surprised that SES has secured US$123m worth of oilfield contract in 2QFY13 alone. Despite its already huge existing orderbook of RM5.2bn (~3.8x FY14 revenue) as of Sept 2013, the company is looking to secure another US$150m contract in the current financial year.

Comments

We came away from the briefing more positive given the strong orderbook and earnings growth going forward. The company is also involved in the bidding for the 3rd round of RSC. We gather from management that the prospect look promising. We conservatively do not include the potential award in our forecasts. A potential marginal field win will conservatively raise our TP range to between RM1.02 and RM1.14 based on 0-50% debt to equity ratio funded (vs. norm of 70% debt to equity ratio).

DWM will be the main booster for long term growth as legislation is trending towards zero discharge as adopted in Caspian and North Sea. 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

We raised our FY14 earnings by 9% to RM96m as the margin compression on oilfield services due to initial ramp up cost for project is less than what we expected. We maintain our FY15-FY16 earnings forecasts.

Catalysts

• Potential to secure RM400m worth of contracts on top of its already huge orderbook of RM5.2bn.
• Contract win in DWM business given the potential addressable market size of US$2.1bn.
• A marginal field contract win.

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 - 20 Nov 2013