Results

• Slightly below expectations: Reported 1QFY17/03 core loss of RM18.0m against our expectations of a full year FY17 profit of RM47m.

Deviations

• Slower than expected performance from drilling fluid business due to slow down in drilling activities.

Highlights

• YoY, SCOMIES ran into core loss of RM18m in 1Q17 from RM10m core profit in 1Q16. The disappointing result was due to (i) significantly lower drilling revenue due to weaker drilling market globally with Russian market being the only exception (ii) wider loss from Marine segment due to fixed costs of higher idling vessels and (iii) slight loss from its Ophir marginal field which is still at its initial stages.

• QoQ, core loss of RM18m was reported against profit of RM6.9m in 4Q16 due to weaker QoQ drilling revenue on account of slowdown in drilling activities and higher vessel idling in Marine business division.

• With oil prices remaining highly volatile for the year, we do not expect a significant pick up in drilling activities anytime soon with oil producers opting to stay pat amid high uncertainties in oil prices. Moving to 2017, we believe outlook for drilling could improve as the oil market rebalances with lagged effects of oil majors CAPEX cut to be felt sometime in the year.

• 1st oil of its Ophir marginal field has been rescheduled to mid- 17 as the group looks to further streamline its cost structure.

• Weak performance of its Marine division is expected to continue for the remaining quarters in CY16 due to current oversupply of marine vessels and subdued activity in the O&G industry.

Forecasts

• Cut FY17 forecast to a loss of RM34m as we adjust for significantly lower drilling business revenue. Losses are expected to be seen in the subsequent quarters.

Catalysts

• Contract wins in DWM business in Middle East and Russia.

• IPM contracts win.

Risks

• Further slowdown in drilling activity;

• Technology advancement;

• Relaxing of drilling waste management regulations.

Valuation

TP reduced to RM0.18 (previously RM0.19) as we switch our valuation methodology to 0.5X FY18 PBV (consistent with asset players’ val uation) from PER valuation due to lack of earnings visibility. Maintain HOLD call on the stock. Despite disappointment in its earnings, we believe it’s largely priced in by the market and its valuations have bottomed around this level.

Source: Hong Leong Investment Bank Research - 12 Aug 2016