Results

• Below expectations: Reported 2QFY17/03 loss of RM24.1m, bringing 1H17 core loss to RM42.1m, significantly below our FY17 full year forecast.

Deviations

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

Dividends

• None.

Highlights

• YoY: Core net loss of RM24.1m was reported in 2QFY17 against RM12.5m core profit in 2QFY16 driven by losses from both Marine and Oilfield business divisions. This was due to low vessel utilisation and dismal drilling activities in all countries due to drop in drilling activities except for Russia.

• QoQ: Core net loss widened as a result of (i) higher Marine loss due to lower coal tonnage with excess capacity and (ii) weaker Oilfield segment driven by lower sequential drilling activities resulting in lower chemical sales.

• YTD: Core loss of RM42.1m was registered in 1H17 against core profit of RM24.6m in 1H16 underpinned by lower overall drilling activities (except for Russia with activity increase seen) and weaker utilisation of Marine vessels as a result of lower coal tonnage moved by the group.

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

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

• The weak performance of its Marine division is expected to continue for the remaining quarters in FY17 due to current oversupply of marine vessels and low O&G general activity.

Forecasts

• Our previous forecast is unchanged but should no longer be used as a reference as we are ceasing coverage on the stock.

Rating

• CEASE COVERAGE, TP: RM0.18

• Earnings outlook remains bleak for the group in the medium term with no earnings visibility amid weak oil prices. No significant pick up in activities is expected in 2017.

Valuation

• Previous TP was at RM0.18 based on 0.5X FY18 PBV (consistent with asset players’ valuation). Officially cease coverage on the stock due to uncertain medium term outlook on drilling activities and lack of institutional interest.

Source: Hong Leong Investment Bank Research - 29 Nov 2016