Results

• 9MFY15 revenue was inline with expectation but PAT only made up 67% 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, weaker earnings from West Africa and Russia coupled with losses from marine segment.

Highlights

• QoQ, oilfield service revenue increased by 10% mainly due to increasing rig counts in Malaysia, Myanmar and Indonesia. In term of PAT, oilfield only increased by 6% QoQ due to lower contribution from higher margin region like West Africa and weaker earnings from Russia due to depreciation of Ruble.

• Despite 3Q revenue up 24% YoY, marine segment remain in losses due to lower utilisation of vessels and volume coal transported. Outlook for coal transport remain weak as lower coal prices and new tax regime imposed by Indonesia government has affected volume of tonnage transported. Contract win from Tenaga to transport coal will help to mitigate the weakness from Indonesia.

• On its Ophir marginal field, mobilising works are on track with drilling expected to start in mid of 2015 and scheduled to hit oil by end of 2015. We only factored in Ophir contribution in FY17/03. New marginal oilfield project is also not viable at current oil price (we have not factored in any new RSC win in our earnings).

• We remain cautious on the near term outlook as we expect oil price is likely continue to remained weak for next few months given that oversupply issue will only adjust if there is any reduction from US shale’s production. We understand that national oil companies (NOCs) comprise around 65% of SES’ revenue. NOCs have traditionally been able to better withstand the impact of declining oil price with long term capex plan. Coupled with RM5bn orderbook, this will help to cushion SES earning amidst declining oil price environment.

Forecasts

• FY15 and FY16 earnings reduced by 20 and 16% respectively with slower orderbook recognition amidst low oil price.

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 HOLD call with a TP adjusted from RM0.59 to RM0.65 after rolled forward valuation to CY16 (unchanged 10x P/E).

Source: Hong Leong Investment Bank Research - 25 Feb 2015