Results

• Slightly below: FY15 revenue was within expectation but core profit only made up of 91% and 84% of HLIB and consensus full-year estimates, respectively.

Deviations

• Mainly due to higher depreciation charges arising from increasing 2P reserves.

Highlights

• FY15 core profit surged 36% yoy after stripping off non-c ore items such as i) RM55m of impairment loss on oil assets (based on US$60/bbl), ii) RM63m from provision gain, iii) RM215m gain arising from the acquisition of Newfield ass et.

• We understand that producing oil assets under SKPetro have PATAMI breakeven at US$60/bbl and EBITDA breakeven much lower than US$50/bbl. Oil assets in Vietnam remain EBITDA positive at current low oil price and the acquisition will only be c ompleted i n FY17. SKPetro is currently negotiating gas sales agreement with Petronas on SK310 field and ex pect to commence development in 2H15 with 1 st gas in 2017.

• Capex spending in FY16 is about RM1.2bn (RM600m for Drilling and RM600m for Energy division). Net gearing stand at 1.3x currently and will be maintained at this level as the RM1.2bn capex will be financed by operating cash flow.

• For Petrobras job, there are 2 vessels operating currently and will add another in FY16 and further increase to total 6 units in FY17. We were reassured that payment is on time and risk of contract termination is low given the PLVs are used in field development to increase production. Interestingly, most of the fields in Brazil (~81%) are commercial viable at US$60/bbl.

• Current orderbook stand at RM26bn and in term of earnings visibility, 78% of our FY16’s forecast has already been secured.

Risks

• Execution risk,
• Prolong low oil price,
• Delay in contract award.

Forecasts

• FY16 and FY17 earnings are reduced by 14% and 11% respectiv ely after factored in higher depreciation charges.

Rating

BUY

Positives

• Strong balance sheet and knowhow, global trendtowards offshore production.

Negatives

• Increased competition for growth markets,complexities of running a larger organization, plunged in oil price.

Valuation

• We believe recent share price plunged already reflected the weak 4Q results. Hence, maintain BUY call with TP reduced from RM3.06 to RM2.85 based on unchanged 14x P/E post earnings downgraded.

Source: Hong Leong Investment Bank Research - 25 Mar 2015