Results

• Inline: Excluding non-cash items of RM142m (including net provision and forex gain), 3QFY16 core PAT fell 20% YoY and 23% QoQ with 9MFY16 core PAT accounting for 82% of HLIB and consensus full-year estimates, respectively.

Deviations

• We deemed the result inline as we expect weaker 4QFY16 earnings due to lower crude oil price and contribution from drilling business.

Highlights

• With oil prices turning weaker in Oct15, SAKP made a total provision of RM296m in 3QFY16, comprising net provision of energy division of RM118m, impai rment on drilling assets of RM119m and impai rment on E&C of RM59m. This is to factor in lower long-term oil price assumptions (pushed back $100 per barrel scenario from 2025 to 2027). We estimate that current oil and gas assets have remaining value of US$970m on the balance sheet.

• Excluding the non-cash item, 3QFY16 PAT dropped 20% YoY and 23% QoQ mainly due to lower contribution from energy and drilling business, partly offset by better performance from E&C.

• Energy business was barely profitable after excluding the impairment of RM140m mainly due to lower average realised selling price of US$48/bbl in 3QFY16 as compared to US$66/bbl in 2QFY16. We expect further weakening in the energy business in 4QFY16 given Brent oil price has fallen below US$40/bbl.

• For its drilling business, operating profit fell by 60% QoQ mainly due to lower utilisation rate of 75% as compared to an average utilisation rate of 94% in 1QFY16. Going forward, we expect tender rig business to face pressure in terms of lower charter and utilisation rate given the challenging outlook. New charter rate is expected to experience a 10-25% reduction.

• Outstanding orderbook has shrunk from RM23bn to RM21bn. Near term risk is slower than expected orderbook replenishment given only 62% of our FY17’s revenue has already been secured.

Risks

• Execution risk, prolonged low oil price and delay in contract award.

Forecasts

• We lower FY17 earnings by 7% mainly to factor in lower profit contribution from drilling and energy business.

Rating

HOLD

Positives

• Integrated business model, global trend towards offshore production.

Negatives

• Increased competition for growth markets, complexities of running a larger organization, plunged in oil price.

Valuation

• Given that low oil price is expected to persist in midterm amid concerns about oversupply from US Shale and Iran, we maintain our HOLD call with TP reduced from RM2.00 to RM1.87 based on 12x CY16 P/E post earning downgrade.

Source: Hong Leong Investment Bank Research - 23 Dec 2015