Results   

Below  Expectation:  3QFY14  registered  RM2.2m  earnings and  managed  to  bring  9MFY14  result  to  barely  breakeven but still fall short of expectations.

Deviations

Mainly lower PBT margin for jack up rig due to initial start -up expenses coupled with higher interest cost.  

Highlights 

9MFY14  result  remains  in  the  black  but  fall  short  of expectations.  This  is  mainly  due  to  i)  lower  PBT  margin  for rig business at about 15% and ii) higher interest cost due to drawdown  of  multicurrency  MTN  program  which  was intend ed  to  financ e  potential  acquisitions  and   strategic expansions.  We  understand  that  PBT  margin  for  rig  should improve  going forward.

To  note,  in  our  recent  oil  and  gas  sector  update,  we  have change our assumption for MOPU to only s ecure contract in 1Q15 vs.  previous assumption in 4Q14.  We are getting more cautious  and  concern  on  the  contract  delay  for  E3  and MOPU, we see downside risk to earnings on FY15 if MOPU fails  to  secure  contract  by  1Q15.  To  be  more  conservative, we now assume  only ~60%  utilisation or 5 month idles time for  MOPU  in  FY15.   Note  that  every  one  month  delay  will translate to RM5.5m lost to the  bottomline.

On the industry outlook, recent declining oil price might slow down  drilling  demand  and  put  pressure  on  charter  rate. However, we opine that local drillers should be less impacted given  local  preference  policy   coupled  with  more  than  10 foreign rigs   contract  are expected to expire in 12 month.   For FY15, we have  assumed  1 quarter profit contribution  for the second  jack  up  rig  which  is   expected  to  be  delivered  by 2Q15.  T hird  rigs will be in 3Q16.

Risks

• Delay in contract award  for MOPU  and execution risk.  

Forecasts

• Given  lower  margin  assumption  on  drilling  rig  and  higher interest  cost,  we  lower  our  FY14  and  FY15  earnings  from RM28m and RM129m  to RM9m and RM106m  respectively.

Catalysts 

• Securing drilling  contracts before  rig delivery.
• New contracts for E3 and MOPU.
• Expand into E&P segment.

Valuation  

• Given that extended  uncertainties  about E3  and MOPU, we downgrade our  rating on the stock to Hold  with  TP  reduced from  RM1.31  to  RM1.07  (based  on  unchanged  12x  FY/15 EPS of  8.9 sen/share)  post earnings  downgrade.

Source: Hong Leong Investment Bank Research - 6 Nov 2014