News

Scomi Energy (SES) proposed a renounceable rights issue of up to RM141m nominal value of 5-year redeemable convertible bonds on the basis of RM6 in nominal value for every 100 existing shares.

The RM141m proceed raised will be used to repay the bridging loan (RM45m) for subscription of 30% equity interest in Ophir field, working capital for existing business and development of Ophir field (RM92m) and defray estimated expenses (RM3.5m).

The conversion price will be at 10% to 35% discount to 5 day VWAMP on a price fixing date and convertible at any time after the second anniversary of the issue date up to the maturity date. The deal is expected to be completed in 1Q15.

Financial Impact

Assuming conversion price of RM0.75 and full conversion of the bonds, shares base will be enlarged by 8% from 2.34bn shares to 2.53bn shares. Gross gearing will fall from 0.7x to 0.6x. However, we believe the dilution will be minimal or even offset due to: i) only convertible after 2nd anniversary of the issue date; and ii) potential more integrated project contracts win.

Comments

We are positive on the fund raising through right issue of convertible bond. This will help to strengthen SES’s balance sheet with minimal dilution effect in near term. Besides funding for Ophir field, we believe the fund raised might also be preparation for potential integrated project management (IPM) contract win in the future.

We understand that integrated project management (IPM) is a global trend as national oil companies and oil majors are outsourcing turnkey projects due to shortage of talents. By building its integration capability which includes project management, SES can handle projects from marginal, brownfield and enhanced oil recovery which presents enormous opportunity. Potential markets are Malaysia, Indonesia and Pakistan.

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 commercialize in 1QCY15.

Forecasts

Unchanged.

Catalysts

• Contract win in drilling waste management (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

We maintained our BUY call with unchanged TP of RM1.24 (based on unchanged 16x CY15 EPS of 7.75sen/share).

Source: Hong Leong Investment Bank Research - 31 Jul 2014