Results

In line: 9MFY14 Core profit registered RM70m, making up 73% of HLIB full-year estimates.

Deviations

None.

Highlights

QoQ, 3QFY14 revenue increased 19% qoq mainly due to oilfield business recording higher revenue driven by ramp up of activity of the Total E&P Indonesia project and tripled in revenue from Myanmar. In addition, marine services also increased QoQ due to commencement of TNB fuel bulk coal carriage contract, higher tonnage carried for 2 key Indonesia customers and increased utilisation from OSV.

QOQ EBIT margin fell from 11.5% to 9.8% due to initial ramp up cost for projects which have yet to register any contribution. Margin should rebound from 4QFY14 onwards. The company expect opex to continue decline due to more streamlined operation post restructuring. West Africa region is performing well with EBITDA expects to increase from US$11m in FY13 to US$20m (~25% of group EBITDA) in FY14.

We also understand that the operations in Malaysia should have delivered stronger result in 3QFY14 (shortfall of US$6m PAT) if not for the delay in commencing some of the drilling programme due to shortage of rig (which benefit UMW O&G and Perisai). Besides growing core business, management shares its long term strategy to expand its product range (such as well completion, sub-surface, wireline and operations and maintenance) and aims to be an integrated oilfield services provider like Schlumberger and Halliburton.

To recap, SES has entered into an exclusive product formulation and marketing agreement with Graphene NanoChem (listed in UK’s AIM Exchange) to deliver a range of formulated PlatDrill series for the oilfield chemical market. We understand the nanofluid should fetch higher margin (10- 20% better than normal drilling fluid). The company has started field test with local oil major and the market size is estimated at around US$1.8bn.

Share price has appreciated 77% within a short period of time or since our initiation report dated 4 Jun 13 and exceeded our TP of RM1.02. Hence, we downgrade the stock from BUY to HOLD. However, in the longer term, we still like SES given potential RSC win and the vastly untapped DWM. To note, if SES wins the RSC, our target price will be raised from RM1.02 to RM1.18. Currently, Scomi Group is trading at 48% discount to its SOP of RM0.91. By pegging at 20% holding company discount, we derive a fair value for Scomi Group of RM0.73 (provides 53% upside from current price). Hence, it is a cheaper proxy to SES.

Forecasts

Unchanged.

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

We downgraded from BUY to HOLD call with an unchanged TP of RM1.02 (based on unchanged 16x FY03/15 EPS of 6.3sen/share).

Source: Hong Leong Investment Bank Research - 20 Feb 2014