Results

• Below Expectation: QoQ, 3QFY14 PATAMI surged by 41% brining 9MFY14 profit to RM29.3, making up 59% of HLIB and 62% of HLIB and consensus full -year estimates respectively .

Deviation

• Mainly due to lower activities for oilfield services coupled with drilling campaign for RSC to commence only in 1Q15.

Highlights

QoQ, revenue inc reased 16% due to higher contribution from drilling project management for PMU wells coupled with maiden contribution from MMSVS. We understand that MMSVS only contribute circa one month revenue in this quarter given the acquisition was only completed in Aug 14.

Despite higher gross profit, PBT margin fell slightly from 11.3% to 10% given higher operating expenses due to hiring for new projects. However, QoQ, PATAMI ma rgin improve from 8% to 10% mainly due to the tax incentive given by MIDA for acquisition of MMSVS. We understand that the tax incentive will last for 5 years.

Drilling campaign for Tanjung Baram is expected to begin in 1Q15 and expects to hit first oil in May 15. Substantial portion of the US$100m development cost by the JV will be contracted to Uzma.

In addition, we do not rule out the possibility of Uzma wining other RSC contracts (potential 14 clusters to be awarded) in the future given their experienc e and knowledge on full field review and reservoir study. Channel check, marginal oilfields are still viable given its average break even price at US$60/barrel.

Risks

• Delays in contract disbursement.
• Execution risk.

Forecasts

• FY14 and FY15 earnings are reduced by 18% and 12% respectively after factored in lower activities for oilfield services and commencement of drilling campaign in 1Q15.

Rating

HOLD

• Positives –Direct exposure to EOR and exploration spending.
• Negatives – Small cap with low liquidity and plunged in oil price.

Valuation

• Although we still like the company in the long run, we are cautious on the near term outlook amidst lower oil price and lack of contract newsflow in next 3-6 months. Thus , we downgraded our call from BUY to HOLD with TP reduce from RM3.66 to RM2.75, based on lower P/E of 12 x (versus 14 previously) post earnings adjustment.

Source: Hong Leong Investment Bank Research - 26 Nov 2014