Results

• Below  expectations:  Despite  1HFY15  revenue  grow  by 16%,  earnings  fell  13%,  making  up  35%  of  HLIB  and consensus’s  full-year  estimates.

Deviations

The  shortfall  is  mainly  due  to  lower  margin  as  a  result  of change  in  product  mix  coupled  with  losses  from  marine segment. Highlights

QoQ,  oilfield  service  revenue  improved  10%  mainly  due  to increasing  rig  counts  in Malaysia  (expect to increase  from 4 rigs  in  1QFY15  to  12  rigs  in  4QFY15),   Thailand  and Indonesia  offs et  by   slow  down  activities  in  West  Africa  and Russia.  In  term  of  PAT,  oilfield  only  increased  by  8%QoQ due to lower contribution from higher margin region like West Africa. We understand that the lower activity in West Africa is due to some rigs demobilisation.

Marine segment  under  pressure  with PAT s wun g  from profit to losses. This was   mainly due to lower utilisation  of  vessels and  volume  c oal  transport ed.  Outlook  for  coal  transport remain  weak  as  lower  coal  prices  and  new  tax  regime imposed  by  Indonesia  government  has  affected  production output  and  the  volume  of  tonnage  transported  for  the  coal segment.

On its Ophir marginal field, mobilising works are on track   with drilling expected to start in mid of 2015 and scheduled to hits oil  by  end  of  2015.  We  understand  the  company  is  still looking  for  opportunity  in  RSCs,  brownfield  and  EOR businesses  in  the  near  future.  Channel  check,  marginal oilfields  are  still  viable  given  its  average  breakeven  price  at US$60/barrel.

Existing orderbook of RM5.5bn (4x of FY14 revenu e)  will help SES to ride through the  volatile period in oil price. In the long run, there are still plenty   of room for  growth  for the company through  i)  inc reasing  market  share  regionally  with  new product  offering;  ii)  commercialise  graphene  nanofluids  and microwave  treatment  products;  and  iii)  potential  securing integrated  project management  (IPM)  contracts.  

Forecasts

• Unchanged  pending  analyst briefing  later 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  a  TP  of  RM1.07  (pending review  of earnings  forecasts ).

Source: Hong Leong Investment Bank Research - 21 Nov 2014