Highlights

Following is the salient points from analyst briefing yesterday. QoQ, oilfield service revenue fell 13% as Malaysia operations continue to experience slow down due to delay in rig schedule from Petronas, partly offset by strong Indonesia, West Africa and Russia’s operations. YoY, Malaysia’s revenue fell by 60% as rig counts have reduced from 14 rigs to only 4 rigs. However, this is expected to pick up in late 2QFY15 with increasing rigs and commencing as 12 rigs are expected to deploy by end of FY15.

The commercialisation of graphene nano fluids is progressing well and the company has secured US$4m purchase order. With full capacity to roll out in FY16, the potential revenue from this segment is about US$40m.

SES is doing well on the drilling waste management especially in West Africa with EBITDA from this segment grew by 2 years CAGR of 42% to US$18.6m. SES is targeting to enter Gabon market given Petronas has signed PSC for one of the deepwater blocks there. SES also shared its bullish view on directional drilling operation with potential global market size of US$14bn (larger than DF and DWM). SES continues to build its capacity in integrated project management (IPM) with plenty opportunities in small and marginal fields in Malaysia, South East Asia and Africa.

Comments

We came away from the briefing more positive and reassure on the positive long term outlook of the company despite temporary slower operation in Malaysia. 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 weak 1Q results will be good opportunity to accumulate.

Forecasts

FY15 earnings reduced by 6% due to delay in recognition of revenue from Petronas’ contract with FY16 earnings remained unchanged.

Catalysts

Contracts 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 TP reduced from RM1.24 to RM1.23 (based on unchanged 16x CY15 EPS of 7.67sen/share) post earnings revision.

Source: Hong Leong Investment Bank Research - 25 Aug 2014