News

TheEdge Weekly and BizStar reported that Tan Sri Quek Leng Chan could have made a big entry into Scomi Energy (SES) directly or through his stable of companies.

Stock market data showed that 268.79m shares, or an 11.5% stake, were trade off market last Friday at 76.5 sen/share (22% discount to Friday closing price of 99.5 sen/share). The block’s seller is believed to be its second largest shareholders Standard Chartered Private Equity Ltd (hold 11.5% stake in SES).

If the news is true, Quek will emerged as second largest shareholder with 11.5% stake after Scomi Group Bhd, which holds a 65.7% stake.

Comments

If the purchase is true, we are positive on the entry of new strategic investor given it will remove the share overhang concern as we understand that Standard Charter PE had been looking to dispose its stake for months now. In addition, we do not rule out any possibility synergy creation between TH Heavy (which Quek has 9% stake) and SES in the long run.

We view Quek’s entry into SES at a right and exciting timing given SES’ potential RSC win and the vastly untapped WMS market. To recap, it was purported that SES (hold 30% stake) has partnered with Octanex (50% stake) and Vestigo (20% stake) for the development of marginal oilfield in Ophir cluster off Terengganu. According to channel check, Ophir is estimated to contain 5m barrels of oil. We conservatively do not include the potential award in our forecasts. If SES wins the RSC, we estimated net earnings in CY15 will be raised by 16%, assuming oil production to start in 2HCY15 with fully contribution in CY16. Hence, our target price will be raised from RM1.02 to RM1.18.

Despite RM360m contract won year to date, SES is confident of securing several additional job orders in South East Asian region as well as Middle East to add to its outstanding orderbook of more than RM5.3bn currently.

We expect the upcoming 3Q FY14 results to be inline with our forecast albeit some margin pressure due to ramp up in initial cost for new projects. Margin should rebound from 4QFY14 onwards. Drilling fluid and waste management should continue to register strong results but partly offset by sluggish coal business.

SES is trading at 15x CY15 P/E versus UMW Oil and Gas at 23x CY 15 P/E. We expect high UMW O&G valuation driving up the P/E multiple of drilling related stocks such as SES.

Catalysts

• 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

Despite our current TP of RM1.02 only provides 2.5% upside, we maintained our BUY call as the potential win of RSC contract will boost our TP to RM1.18 (which provides 19% upside from current share price).

Source:Hong Leong Investment Bank Research - 17 Feb 2014