Results

• Below: 1QFY16/03 profit fell 22% QoQ, only accounting for 12% of HLIB and consensus forecast.

Deviations

• Mainly due to lower margin from oil field services coupled with losses incurred for its coal and OSV segments.

Highlights

• QoQ, 1QFY16 oilfield service revenue fell by 13% due to lower rig counts in Nigeria, Myanmar and Indonesia. In terms of PAT, oilfield fell by 22% YoY due to lower product margin mix.

• QoQ, marine segment fell into red due to lower coal volume transport coupled with lower utilisation rate for its OSVs. Coal market outlook is likely to remain weak due to weakening demand from China. As such, we have assumed barely breakeven for the division going forward.

• Drilling activity is expected to decline given recent weakening of oil price towards US$40/bbl with oil operators reducing capex and opex. In view of the challenging environment, Scomi Energy is looking to expand its product range into EOR, well rejuvenation and chemical sales to mitigate the slowdown in drilling fluid business. In addition, cost optimization effort continued to prevail, with opex lowered by 29% QoQ.

• We understand that breakeven cost for marginal field is around US$65/bbl and existing RSC contractors are working to lower development cost to make sure marginal fields are still feasible. In this regard, we believe Ophir marginal field will still proceed, but we conservatively assume only 6 months contribution in FY17/03 after factoring in potential delay.

• Although orderbook remains sizeable at RM4bn, we expect progressive revenue recognition from orderbook to slow down as oil companies are reducing capex and drilling campaigns.

Forecasts

• FY16 and FY17 earnings reduced by 44% and 24% respectively to reflect slower orderbook recognition and lower margin for oilfield and marine business.

Catalysts

• Contract wins in DWM business.

• 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 RM0.45 to RM0.26 based on lower target P/E of 8x (as compared to 10x previously) post earnings downgraded.

Source: Hong Leong Investment Bank Research - 26 Aug 2015