Results

• Deemed within: 2QFY17 core net profit of the group came at RM64.1m, bringing 1H17 core net earnings to RM173.9m Deemed within our and consensus expectations as we expect weaker quarters ahead in view of stacking of more rigs. That aside, 4Q is seasonally the weakest quarter of the year and we anticipate a weaker 4Q in FY17.

Deviations

• None.

Highlights

• YoY, the group’s 2QFY17 core net profit plunged 83.4% mainly underpinned by (i) lower E&C top line and operating profits due to lower work scope done and margin pressure amid industry downturn (ii) weaker YoY drilling revenue and profitability due to lower no. of rigs in operation but being partially cushioned by favourable movements in US$/MYR forex, and (iii) weaker Energy division due lower realized oil prices (2Q17: US$48/bbl vs. 2Q16: US$65/bbl).

• Sequentially, SKPETRO’s core net earnings halved by 41.6% to RM64.1m in 2QFY17 due to both weaker E&C and Drilling division business performances. E&C top line and operating profit suffered QoQ as its major projects came to completion in the quarter (Wheatstone LNG Australia being a major part) and slower T&I Pan Malaysia work orders. Drilling division was also weaker QoQ as more rigs were out of work this quarter. Energy, however, did better sequentially due to recovery in lifting price QoQ consistent with oil price rally in 2QFY17.

• Cumulatively, 1HFY17 core net profit unsurprisingly declined by 72.6% YoY due to lower scope of works for E&C division coupled with margin squeeze and lower drilling revenue post several tender rigs coming off charter in FY17. Energy division has also seen both its revenue and operating profit suffer YoY due to lower oil lifting price and lifted bbls due to lower infield drilling activity.

• Orderbook stands at RM17.7bn including ytd wins worth RM3.3bn. However, the current orderbook, in our opinion, is insufficient to sustain the group’s revenue base (in FY18 in particular) at its previous levels, in line 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 adjusted downwards slightly by 4.5/4.7% for FY17/18 as we exclude RSC Berantai contribution.

Rating

HOLD

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

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

Valuation

TP is increased to RM1.57 from RM1.35 based on higher 0.7x FY18 PBV. Despite weak earnings outlook, we turn slightly more positive on the company due to (i) relatively resilient Energy earnings post cost cutting (ii) its huge gas reserve with high monetisation potential and (iii) anticipated news flow on upcoming Pan Malaysia T&I packages. Upgrade to HOLD.

Source: Hong Leong Investment Bank Research - 29 Sep 2016