Results

• Below Expectations: 2QFY16/03 profit fell 32 YoY%, bringing 1HFY16 earnings to RM24.6m, only accounting for 44% of HLIB and consensus forecast.

Deviations

• The slight deviation mainly due to widening of losses incurred for its coal and OSV segments.

Highlights

• 2QFY16 oil field service revenue fell by 21% YoY and 12% QoQ due to drop in rig count and lower activity level in Malaysia, Myanmar and Indonesia. In terms of PAT, oil field grows by 5% QoQ due to favourable product mix and cost optimisation initiatives.

• QoQ, marine segment doubled its losses from RM2.7m to RM5.7m 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. We do not expect its coal division to be profitable anytime soon.

• Drilling activity is expected to remain muted given recent weakening of oil price towards US$40/bbl. 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.

• On its Ophir marginal field, 1st oil target remains unchanged at middle of 2016. We believe Ophir marginal field will still proceed and we have assumed 6 months contribution in FY03/17.

• Balance sheet remains solid with net gearing at 0.2x and Debt/EBITDA ratio less than 2x. Given its strong cash flow generation with EBITDA per annum of circa RM200m, we do not rule out any possibility that SES will start paying out dividend. Assuming 50% payout ratio (circa RM40m dividend payout), we can expect a potential dividend yield of 6.2% based on current share price.

Forecasts

• FY16 earnings forecast is reduced by 10% to reflect slower orderbook recognition and widening of losses from 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 RM0.26 to RM0.25 based on unchanged P/E of 8x post earnings downgrade.

Source: Hong Leong Investment Bank Research - 30 Nov 2015