Results

• Below Expectations: 9MFY15 core profit was flat YoY, making up 55% of HLIB and consensus full-year estimates.

Deviation

• Mainly due to lower utilisation of Uzmapres (6 units not operational for one month in Sept15 due to platform maintenance) and lower contribution from drilling consultancy.

Highlights

• 3QFY15 core profit (excluding forex loss of RM27m) fell 57% QoQ mainly due to lower activities across all segments amidst low oil price envi ronment. There are 6 units of Uzmapres not operational in Sept 15 due to platform maintenance. Lower cont ribution from drilling consultancy and associate, SVP and staff bonus payment also affected its profitability.

• To note, the RM27m unrealised forex losses are treated as non-cash item, given that its US debt is naturally hedged as income from Tanjung Baram is denominated in US dollar.

• Tanjung Baram already hit oil in 3Q15, and is expected to start contributing in 4Q15 with full year contribution in FY16. We estimated Tanjung Baram RSC to contribute circa RM14m per annum to the bottomline.

• On its MMSVS business, average utilisation is currently at circa 60% and is expected to pick up from 4Q15 onwards with some potential contract wins.

• Overall, O&G activities slowed down and are expected to continue into 4Q15. However, we expect the contribution from Tanjung Baram and D18 in FY16 to help offset the decline in activities in other segments.

Risks

• Delays in contract disbursement.
• Execution risk.

Forecasts

• FY15 and FY16 earnings forecasts are reduced by 23% and 15% after factoring in lower activities across drilling consultancy, Uzmapres and chemical business.

Rating

• HOLD

Positives

• Direct exposure to EOR and exploration spending.

Negatives

• Small cap with low liquidity and plunged in oil price.

Valuation

• Given the sluggish O&G outlook in near term, we downgrade the stock from BUY to HOLD with TP adjusted from RM2.38 to RM2.03 based on unchanged FY16 P/E of 9x post earning downgrade. In the long term, we continue to like the company given its niche in providing low cost solution to oil producers.

Source: Hong Leong Investment Bank Research - 30 Nov 2015