Results

• Below Expectation: 2QFY16 core profit (excluding RM2.3m unrealized forex loss) stood at RM0.2m, bringing its 1H16 core net profit to RM6.5m. It is below our and consensus expectations at 32.5% and 31.4% respectively.

Deviations

• Lower than expected contribution from JV as a result of discount given on FPSO Kamelia charter.

Highlights

• YoY, core net profit plunged 89% to RM0.2m in 2Q16 due to lower JV contribution from the FPSO Kamelia due to discount given on charter rate and higher finance cost on higher borrowing level.

• QoQ, core net profit fell by 97.2% due to lower FPSO contribution on charter rate discount and slightly weaker drilling business performance.

• OSV business segment continues to anchor the group’s earnings due to the slump in both drilling and pipelaying industry.

• However, recent news of Ezra being riled up with financial issues has raised concerns on the earnings sustainability in the businesses mentioned.

• Perisai Pacific 102 is likely to be not delivered to the group given the current market condition. As the group has previously written off its rig deposits in 4Q15, further impairment risk remains low for this particular asset.

• Delivery date for Perisai Pacific 103 has been further delayed to Oct 16 from July 16 as agreed with the shipyard. We believe that the group would not risk taking delivery of any drilling asset as long as no contract is secured for the assets.

• The group also possesses the put option to dispose off remaining 50% stake in its currently loss-making E3 barge to EMAS offshore, which is agreed to be at US$40m, timely for the group under the current turbulence to repay its borrowings.

Risks

• Delay in contract award for MOPU and execution risk.

• Rig delivery in absence of charter contract

Forecasts

• Cut FY16/17 forecast by 29.8%/54.1% to account for lower FPSO Kamelia JV contribution.

Catalysts

• Securing drilling contracts before rig delivery.

• New contracts for E3 and MOPU.

• Expand into E&P segment.

Valuation

We maintain HOLD call on the stock with TP cut to RM0.205 from RM0.225 pegged to lower 0.4x to FY16 BVPS.

Source: Hong Leong Investment Bank Research - 25 Aug 2016