Results

Below expectations: 1QFY15 earnings rebounded 107% QoQ but flat YoY, making up 18% of HLIB and consensus’s full-year estimates.

Deviations

The shortfall is mainly due to lower activities in Malaysia.

Highlights

QoQ, oilfield service revenue fell 13% mainly due to lower rig counts in Malaysia. We understand this is attributed to delay in rig schedule from Petronas. However, this is expected to pick up in late 2QFY15 with increasing rigs and new contracts commencing. On the regional drilling outlook, activities in Indonesia, Thailand, Myanmar and Turkmenistan are set to continue to increase.

After two consecutive quarters of losses, its marine business has swung to profit mainly due to higher utilisation rate from vessels coupled with contribution from Tenaga contract. Coal segment remain cautious as a result of lower coal prices in Indonesia but mitigated by the contract from Tenaga. Out of the two accommodation barges that undergone refurbishment in previous quarter, Kaspadu is already back to operation. Another new accommodation barges will be delivery in Sept 14.

Despite the short term hiccup on slower 1Q earnings, we expect subsequent stronger quarters driven by pick up in rig counts from Petronas and increasing contract wins from Indonesia and Thailand. In addition, we see multiple growth catalysts going forward: i) potential expanding orderbook from RM5.5bn to RM7bn due to increasing market share regionally; ii) commercialise graphene nanofluids and microwave treatment products; and iii) potential securing integrated project management (IPM) contracts. Hence, any weakness in share price due to slower 1Q result will be good opportunity to accumulate.

Forecasts

Unchanged pending analyst briefing today.

Catalysts

Contract win in DWM business given the potential addressable market size of US$2.1bn.

IPM contracts 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 RM1.24 (based on unchanged 16x CY15 EPS of 7.75sen/share).

Source:Hong Leong Investment Bank Research- 22 Aug 2014