Results

• Deemed within: 2QFY16 losses amounted to RM67.2m, bringing 1H16 core losses to RM159.6m. That compares to our full year net loss estimate of RM273m (58.4%) and consensus of RM232m (68.8%).

Deviation

• None.

Highlights

• YoY, the group posted RM67.2m losses in 2Q16 against RM4.5m core profit in 2Q15 mainly due to lower number of rigs being utilised and lower time charter rates. That aside, delivery of new rigs this year exerted further negative impact on the group’s earnings.

• QoQ, losses narrowed to RM67.2m in 2Q16 from RM92.4m in 1Q16 mainly underpinned by higher rig utilisation as a result of QoQ improvement in drilling activities with time charter rates remaining largely unchanged QoQ.

• Ytd, the group raked in cumulative core loss of RM159.6m in 1H16 vs. core net profit of RM36.6m in 1H15 as a result of (i) lower number of operating rigs due to expiry and early termination of drilling contract (ii) lower time charter rates renegotiated in the financial period and (iii) higher asset overhead YoY due to delivery of Naga 7 and Naga 8.

• While we still expect the group to register full year loss in 2016, we opine that its financial performance may have bottomed out in 1Q16. Losses could be narrower in the coming quarters premised on (i) resumption of Naga 6 into operation with contract expected to start in Oct and (ii) sustained contract for Naga 7 and 8 until end of the year.

• Cash flow remains an issue for the group with high asset burn rate and impending obligation to settle its RM1.3bn worth of short term borrowings before end of this year. The group may need to resort to dilutive equity fund raising or help from its parent co. to avoid refinancing its short term debt at significantly higher interest cost.

• In the current oversupplied rig market, we opine that charter rates and utilisation rates could remain low in the near term until sustainable oil price recovery is seen.

Forecasts

• Maintained.

Risks

• Global recession hitting O&G price; High asset cash cost; Petronas’ further CAPEX and OPEX cut.

Rating

• SELL

• Positives: Market leader in domestic drilling sector.

• Negatives: Oversupply in jack up rig market, high asset overhead, and high short term borrowings.

Valuation

• We maintain our SELL call with TP maintained RM0.69 pegged to unchanged 0.5x FY16 BVPS.

Source: Hong Leong Investment Bank Research - 23 Aug 2016