Results

• Below Expectations: Reported 1Q16 core loss of RM26.4m, vs. our and consensus forecast of core profit of RM120.0m and RM114.9m respectively.

Deviations

• Significantly weaker than expected HUC activities due to low oil prices.

Highlights

• In 1Q16, the group posted a core net loss of RM26.4m vs. RM34.4m profit in the corresponding quarter last year underpinned by (i) lower Perdana vessel utilisation of 50% in 1Q16 vs. 76% in 1Q15 (ii) higher interest cost post full consolidation of Perdana’s debt and (iii) significantly slower work orders on the group’s HUC contract.

• As 1Q is usually the weakest quarter for the company due to monsoon season, we expect the company to report slightly stronger numbers in the coming quarter as we anticipate stronger activities for its HUC contract post recovery of oil prices from multi-year low of US$26/bbl to the current level of US$45-50/bbl. Notwithstanding, our base case still implies that the recovery in activities would not be sufficient to reverse the group’s loss making position.

• In April, the group has completed the issuance of Sukuk Murabahah worth RM635m guaranteed by Danajamin Nasional Berhad to adhere to the Shariah laws. This loan would have a tenue of 12 years from the date of issuance, reducing the group’s credit risk in the near term. We also gather that the finance cost of the refinanced loan would be similar to before thus making this debt issuance earnings neutral to the company.

• The group has also submitted application to Bursa for a further extension of 6 months from 13th Feb 2016 to 12th Aug 2016 to comply with the public shareholding spread requirement for Perdana Petroleum as the group’s holding in Perdana Petroleum is less than 10%. We believe that the group would face difficulty in paring down its stake in Perdana within the stipulated time given the market weaknesses in the near term.

Risks

• Political risk; Delays in contract disbursement; and Execution risk.

Forecasts

• We cut our forecast for FY16 and FY17 to a loss of RM62m and profit of RM10m respectively to account for slower HUC work orders.

Rating

SELL

Positives

• solid track record and expertise in HUCC.
• captive market for topside maintenance.

Negatives

• Slowdown in O&G activities.

Valuation

• Downgrade the stock to SELL from HOLD with TP cut to RM0.84 pegged to 0.8x CY17 PBV. We have decided to switch our valuation methodology to PBV from PER due to high uncertainty of the group’s earnings amid prolonged industry slump.

Source: Hong Leong Investment Bank Research - 26 May 2016