Highlights

• Following are the salient points from analyst briefing yesterday. QoQ, oilfield revenue increased by 10% but EBIT margin fell from 11% to 10% mainly due to depreciation of Ruble which resulting in higher material costs as well as lesser contribution from high margin countries like West Africa. Domestically, drilling campaign from Petronas continued to pick up with rig count increased from 4 rigs in Jun 14 to 12 rigs in Sep 14 and further increase to 15 rigs in 1Q15.

• In term of Marine business, SES is transporting circa 4.2m metric tonnes of coal per annum for Tenaga currently. In addition, SES is tendering 10-15 years long term contract to provide coal transport services for Tenaga. Success in securing this contract will help to mitigate the weaker operation from Indonesia. Moreover, the delivery of new accommodation work barge has been delayed to Mar 15 and company is confident to secure a contract.

• On its Ophir marginal field, Petronas confirmed it is proceeding but noting cost savings to be prioritized. SES and its partners has successfully reduced capex which will help to shield the project especially amidst declining oil price. To date, project capex has been reduced from US$135m to US$105m with further US$10m saving targeted.

• Overall, SES is bidding for US$2bn contract and expects to expand its orderbook from RM5bn to RM6-7bn in next 18 months. According to Upstream, SES is bidding operation and maintenance services for D18 Water Injection project which could worth US$100m.

Comments

• In the long run, there are still plenty of room for growth for the company through: i) increasing market share regionally with new product offering; ii) commercialise graphene nanofluids and microwave treatment products; and iii) potential securing integrated project management (IPM) contracts.

• We also understand that national oil companies (NOCs) comprise around 65% of SES’ revenue (versus 56% in 2012). NOCs have traditionally been able to better withstand the impact of declining oil price with long term capex plan. This will help to cushion SES earning amidst declining oil price environment.

• However, we remain cautious on the near term outlook as we expect oil price is likely continue to remain weak for next few months given that oversupply issue will only adjust if there is any reduction from US shale’s production.

Forecasts

• Unchanged.

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 and TP of RM0.65 based on unchanged 10x CY16 P/E.

Source: Hong Leong Investment Bank Research - 26 Feb 2015