Highlights

• Following are the salient points from analyst briefing yesterday.

• Oilfield service revenue fell by 21% YoY and 12% QoQ due to drop in rig count and lower activities in Malaysia, Myanmar and Indonesia. Contribution from Malaysia continued to weaken from 22% to 13% QoQ as rig counts has reduced from 5 rigs to 3 rigs currently.

• QoQ, marine segment doubled its losses from RM2.7m to RM5.7m due to lower utilisation from OSV segment but partly offset by better contribution from coal segment. Without the losses from OSV, coal segment was profitable at RM6m in the quarter. We expect marine segment to remain in losses in subsequent quarters given the bleak outlook for OSV segment.

• Overall, EBIT margin has improved from 7.1% to 8.9% as cost optimization effort continued to prevail. On its Ophir marginal field, 1st oil target was delayed to 4QCY16. We believe Ophir marginal field will still proceed and we have assumed 6 months contribution in FY03/17.

• To mitigate the dropped in drilling activities, SES has expanded its product range from drilling fluid to production chemical and maintenance services. In term of market, SES sees strong demand from Middle East, Russia and Argentina. This will help to cushion the slowdown in activities in Malaysia and Nigeria

• 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 possibility of SES to start pay out dividend. If assume 50% payout ratio (circa RM40m dividend payout), we can expect potential dividend yield of 6.7% based on current share price. Orderbook remains sizeable at RM4bn but we expect progressive revenue recognition from orderbook to slow down as oil companies are reducing capex and drilling campaigns.

Forecasts

• Unchanged.

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 unchanged TP of RM0.25 based on unchanged 8x CY16 P/E.

Source: Hong Leong Investment Bank Research - 2 Dec 2015