Results

• Below expectations: 1Q16 core net prof it came in at RM5.2m (excluding unrealised FOREX gain of RM15.8m), accounting for 10.1% and 9.4% of our and consensus full-year forecast.

Deviation

• Weaker than expected O&G maintenance act ivities and low er recognition of Tanjung Baram RSC income.

Highlights

• 1Q16 core net prof it fell 60.5% YoY due to low er maintenance activit ies amid oil price slump in the quarter. GP margin has also been squeezed by 230 basis points to 21.9% in the quarter as a result of contract renegot iat ion by its major clients. Moreover, interest costs have also increased YoY upon recognit ion of f inance costs f rom Tanjung Baram RSC, w hich has achieved its 1st oil in October last year.

• The group has also seen minimal contribution f rom Tanjung Baram RSC in the quarter due to slow er oilf ield CAPEX cash recovery amid oil price slump w hile the group has taken a more prudent approach in its accounting by recognizing minimal prof its at the current stage.

• The remaining quarters in 2016 w ould be stronger w ith maintenance activit ies anticipated to pic k up gradually in line w ith recovery in oil prices. Its coiled tubing unit have also gone online in April 2016.

• D18 w ater injection project, or iginally slated for commencement in April, is expected to be delayed slightly to the month of June as the group f inishes its f inal touches on the w ater injection asset. Day rate of the asset is estimated to be at circa RM190,000/day and it w ould help to lif t the group’s earnings in 2H16.

• Instead of embarking on acquisit ion spree like last year, the group w ould streamline its existing business w hereby some businesses acquired last year have duplications in terms of their operations.

• Cost savings could be realised on this exercise but w e have decided not to factor in any potential savings in v iew of uncertain business out look for UZMA.

Risks

• Delays in contract disbursement.
• Execution risk.

Forecasts

• We cut our FY16 and FY17 forecast by 20.6% and 22.9% to account for low er recognition of Tanjung Baram RSC in view of w eak oil prices in the medium term and s low er w ork orders for its oilf ield maintenance business.

Rating

HOLD

Positives

• Direct exposure to EOR and exploration spending.

Negatives

• Small cap w ith low liquidity and plunged in oil price.

Valuation

• Hold call maintained w ith TP revised slightly upw ards to RM1.72 f rom RM1.64 as w e roll forw ard our valuat ion to CY17 EPS based on higher PER of 10x f rom 9x previous ly. We believe the company deserves higher mult iple due to its relat ively decent earnings certainty relat ive to its asset heavy peers reinforced by earnings cushion f rom recurring D18 w ater injection project.

Source: Hong Leong Investment Bank Research - 26 May 2016