Results

• Below expectations: 2QFY15 PATAMI fell by 93% YoY, bringing 1HFY15 PATAMI to RM37m and making up 18% of HLIB and consensus full-year estimates, respectively.

Deviations

• Mainly due to lower charter rate (as a result of higher discount given to existing clients amidst plunge in oil price), lower utilisation rate coupled with additional expense from Naga 7 (due to early termination of contract).

Highlights

• QoQ, 2QFY15 revenue reduced sharply by 41% mainly due to sharp fall in drilling revenue as a result of lower time charter and utilisation rates coupled with additional expense from Naga 7.

• EBIT recorded a sharper decline by 71% QoQ as a result of lower charter rate and additional expense from Naga 7 with fixed operating cost structure. We expect 3Q result to remain weak as average rig utilisation will be under pressure with 4 rig cont racts (Naga 2, 3, 5, 6) expiring in FY15. We further reduced our assumption of average utilisation rate from 75% to 61% and lower average charter rate from US$142k/day to US$118k/day in FY15.

• We remain cautious on the drilling rig providers given the increasing pressure on the charter rate and utilisation. We expect the situation to continue given oversupply in the rig market with declining oil price dampening hope for any recovery in near term. According to channel checks, rig service providers al ready started to see pressure on charter rate with average 20% to 25% reduction. The number of new tenders also dropped by 50%.

Forecasts

• FY15 and FY16 earnings reduced by 76% and 47% respectively after factoring in lower charter and utilisation rates for the drilling business.

Risks

• Global recession hitting O&G price; Technology advancement; relaxation of Petronas’ domestic Policy.

Rating

SELL

Positives

• Market leader in domestic drilling sector with strong balance sheet to expand further.

Negatives

• Increased competition.

Valuation

• We reduced our target P/E from 14x to 11x given the weak industry outlook and sentiments as WTI fell below US$40/bbl given concerns about oversupply from US Shale and Iran coupled with weakening demand from China.
• We maintain our SELL call with TP adjusted from RM1.85 to RM0.77 based on lower target P/E of 11x (from 14x previously) post earnings downgrade.

Source: Hong Leong Investment Bank Research - 26 Aug 2015