Highlights

• Following are the salient points from analyst briefing held last Friday.

• For its struggling Marine business division, there is no more goodwill sitting on its balance sheet with the group impairing all of it in the previous quarter. The group had also terminated purchase of 1 vessel last year amid weak Marine industry activity. Deposit on the cancelled order is forfeited but it is mentioned that it could be utilised for the next purchase.

• In Malaysia, Petronas rig count numbers remained dismal with only 2 rigs drilling in 3QFY16 and 4 drilling in 4QFY16. Based on our understanding, the group is able to sustain USD400,000/year revenue from drilling fluids on per rig basis.

• Russian drilling market is still doing relatively well with increasing demand seen but management has maintained their cautiously optimistic view due to its high country risk.

• The group has also done well in Middle East with 40 rigs tender won from Saudi Aramco in 4QFY16. The markets that did not do as well are Indonesia, West Africa and US due to shrinkage in demand.

• For its upcoming Ophir RSC project, 1st oil is expected to be in 2QCY17. The field is expected to be still slightly P&L positive with its expected breakeven cost at the sub USD40/bbl level. This is a result of cost savings of the group as it began developing the field when oil price crashed last year, leaving ample room for cost savings for both its CAPEX and OPEX.

• While we feel encouraged by the management’s actions to cut costs and new product initiatives (i.e. introduction new chemical products and providing more value added services), medium term outlook for the company remains bleak due to its direct exposure to the weak drilling market globally.

• The company is also taking steps to reduce its dependency on drilling through expansion into field production chemicals, of which the demand is expected to be less cyclical compared to its core drilling fluid business but impact on bottom would be minimal at this juncture.

Forecasts

• FY17 forecast is cut by 29.9% to account for higher Marine losses and lower drilling fluid revenue. FY18 core net profit of RM60m is introduced based on higher drilling revenue due to anticipated improvement in the drilling market.

Catalysts

• Contract win in DWM business

• Product penetration into new countries.

• Turnaround in Marine business.

Risks

• Global recession hitting O&G price;

• Technology advancement;

• Relaxing of drilling waste management regulations.

Valuation

We maintain our HOLD call but with a lower TP of RM0.19 from RM0.21 as we roll forward our valuation to CY17 based on unchanged 8x PER.

Source: Hong Leong Investment Bank Research - 6 Jun 2016