Highlights

Following is the salient points from analyst briefing yesterday.

4QFY14 PBT fell 11% YoY and 14% QoQ mainly due to marine business registered EBIT loss of RM7.6m arising from earlier than expected docking for maintenance and continued refurbishment of the 2 units of accommodation barges. Lower volume transport in the coal business was mitigated by revenue contribution from RM159m Tenaga contract.

Oilfield division maintained strong performance with revenue surged by 36% YoY driven by ramp up of activities in West Africa, Myanmar and Russia. Malaysia continues to experience lower rig counts due to delay in drilling schedule from Petronas. To note, international business has contributed 73% to SES’s topline. Scomi Energy (SES) aims to achieve US$100m revenue for Indonesia and Thailand within the next 2 years.

Latest orderbook stand at RM5.3bn (~3.7x of FY14 revenue) with 48% contract value from Petronas. SES is targeting to expand its orderbook to RM7-8bn in the next 12-18 months.

Graphene nano fluids will set to be a game changer for the company. SES has commercialised graphene drilling fluids and the market size is estimated at around US$2bn. We expect the new products (including base oil, production chemical and shale’s chemical) to strengthening SES’s foothold in oilfield fluid market and improve margin going forward.

Another new product, microwave cutting treatment is progressing well and expected to commercial in 1QCY15.

Comments

We came away from the briefing more positive given the strong orderbook and earnings growth from new products going forward. The company is also involved in the bidding for one of the RSC. We gather from management that the prospect look promising. To note, if SES wins the RSC, our target price will be raised from RM1.02 to RM1.18.

Drilling waste management will be the one of the main booster for long term growth as legislation is trending towards zero discharge as adopted in Caspian and North Sea. The potential market size is estimated at US$2bn.

In addition to expand its core drilling fluid business, we see multiple growth drivers from: i) new product – graphene nanofluids; ii) microwave cutting treatment; and iii) integrated project management (RSC, brownfield and EOR).

Forecasts

Unchanged as we expect the OSV business to rebound in FY15 after completion of refurbishment for 2 accommodation barges.

Catalysts

• Contract win in DWM business given the potential addressable market size of US$2.0bn.
• A marginal field contract win.

Risks

Global recession hitting O&G price; Technology advancement; Relaxing of drilling waste management regulations.

Valuation

Although we remained positive about its long term prospects, share price has already largely reflected its fundamentals, thus, we maintained our HOLD call with an unchanged TP of RM1.02 (based on unchanged 16x CY15 EPS of 6.35sen/share)

Source:Hong Leong Investment Bank Research - 3 Jun 2014