Highlights

• D18 Water Injection Project is still expected to proceed as planned despite its relatively bigger upfront investment as Petronas still considers it as a necessary OPEX. Currently, HUC works are being done on the project. Earnings would start to contribute from 2Q16 onwards, consistent with our earlier expectations.

• Tanjung Baram RSC has started contributing since 1Q this year after the rectification of problems faced earlier during tie-in with Petronas. The company has decided to start recognising earnings in 1Q16 despite first oil in 3Q15 to remain prudent and consistent with the accounting policies.

• These 2 projects (D18 & Tanjung Baram) are expected to provide new recurring income streams for the company in the coming years.

• However, erosion of margins is unavoidable across all its major segments amid overall downturn in the industry. This is driven by stronger price competition from foreign oilfield services players.

• 2016 would be a year of consolidation for the group as it intends to realise cost savings through removal of operational duplications post the takeover of 7 new businesses in the past 2 years. In the meantime, the group would slowdown its acquisition activities to conserve more cash in light of tough times ahead.

Forecasts

• We have cut our FY16 earnings forecast by 18.2% to RM52.7m by adjusting our EBIT margin assumption downwards to 12.3% from 15.3% previously after taking into account the imminent margin erosion amid low oil prices.

Catalysts

• Contract wins in DWM business.

• IPM contracts win.

Risks

• Delays in contract disbursement.

• Execution risk.

Valuation

We maintain our HOLD call with a lower TP of RM1.66 based on unchanged 9x CY16 P/E post earnings downgrade.