Results

• Deemed within: 1Q17 core net profit of the group came at RM109.7m. We deem it within our expectations as we expect weaker quarters ahead in view of stacking of more rigs and slowdown in some E&C contracts.

Deviations

• None.

Highlights

• YoY, the group’s core net profit weakened by 56% due to uninspiring performances from both the Energy and Drilling business divisions amid low oil price environment.

• Comparing against the preceding quarter, the Energy division turned around to become profitable in 1Q16. YoY weakness was due to lower average realized oil price in the quarter and lower barrels of oil lifted during the period under review. The company has decided to reduce its infield drilling activities in line with the decline in natural oil reservoir.

• For its drilling business, operating profit plunged by 23.6% YoY as more rigs came off charter in the quarter as their contracts came to completion. 6 rigs are on stack while 2 are going into reactivation to proceed with new contracts and contract extensions. The negative impact is partially mitigated by improvements in operational performance and cost efficiency.

• E&C division saw a more significant drop in operating profit of 58.1% YoY due to slower work recognition and squeeze in both fabrication and T&I margins as majority of its clients asked for further discounts amid slowdown in the services industry. As a result, operating margins declined to 8% in the quarter vs. 17% previously.

• Orderbook currently stands at RM20.3bn including recent wins worth RM513m. However, the current orderbook, in our opinion, is insufficient to sustain the group’s revenue base at its previous levels, in tandem with the general slowdown in the O&G industry.

Risks

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

Forecasts

• Earnings forecasts are maintained due to higher uncertainty in E&C and Drilling profitability.

Rating

HOLD

• Positives – Integrated business model, global trend towards offshore production, active initiative to rebase cost to adapt to the new normal.

• Negatives – Increased competition for growth markets, margins pressures on E&C contracts.

Valuation

• TP is maintained at RM1.58 based on unchanged 0.7x FY18 PBV. Hold recommendation is maintained on the stock despite recent weakness in the share price. We believe 2Q financial results would provide a clearer indication on how the company would fare in the medium term.

Source: Hong Leong Investment Bank Research - 29 Jun 2016