Results

Slightly Below Expectation: QoQ, 2QFY14 Core profit increased by 12% bringing 1HFY14 to RM114m, making up 40% and 42% of HLIB and consensus full-year estimates, respectively.

Deviations

Despite expectation of stronger 2H14 with addition contribution from Naga 5 (delivered in Apr 14) and Naga 6 (around Sep 14), lower margin from drilling segment has caused the shortfall.

Highlights

QoQ, 2QFY14 revenue increased mainly due to additional revenue contribution by Naga 5 which was mobilised to Philippines on May 14, improved utilisation of hydraulic workover unit GAIT 3 coupled with higher commission income from agency sale of specialised drilling equipment and services. However, EBIT margin soften from 28% to 26% as Naga 3 underwent a scheduled repair to a few of its ballast tanks in May 14.

We understand that Naga 2 and Naga 3 contracts have been extended until Mar 15 which further underpins its earnings visibility. Naga 6 is near completion and ready to delivery in Sep 14. The company is in active negotiation to secure contract with potential to commence operation in 4Q14 (in line with our assumption).

On hydraulic workout business, we expect utilisation rate to improve going forward (we have assumed average of 70% utilisation in FY14) as UMW GAIT 2 was mobilised to Vietnam in July 14 coupled with GAIT 5 and 6 which will continue to operate for the rest of FY14. On the other hand, oilfield service remains weak due to soft demand.

After the recent acquisition of Naga 6 and 7, a total of 8 rigs will be operating in FY15. Naga 6 is expected to be completed and delivery in Sep 14, Naga 7 in Dec 14 and Naga 8 in Sep 15. Net gearing is expected to remain comfortable at 0.4x by end of FY14, which still provides room for asset acquisitions.

Domestically, there is a shortage of locally owned rigs. As of Sept 2013, there are 16 jack-up rigs operating in Malaysia but only 2 are locally owned (Naga 3&4).

Forecasts

FY14 earnings reduced by 3% after incorporate lower utilisation rate for Naga 3 but FY15 earnings maintained.

Risks

Global recession hitting O&G price; Technology advancement; relaxation of Petronas’ domestic Policy.

Rating

HOLD

Positives: Market leader in domestic drilling sector with strong balance sheet to expand further.

Negatives: Increased competition for the markets.

Valuation

We maintain our HOLD call and TP of RM4.12 based on unchanged 20x FY15 EPS of 20.6 sen/share. Despite the positive news for the drilling sector, we believe current price has already largely factor in its fundamentals.

Source: Hong Leong Investment Bank Research - 26 Aug 2014