Results

• Within expectations: 3Q16 core net profit came in at RM8.1m, bringing is 9M16 earnings to RM18.8m, accounting for 78% of HLIB forecast but below consensus at 54%.

Deviation

• None.

Dividends

• None.

Highlights

• YoY: Core net profit surged 59.9% in 3Q16 underpinned by (i) higher activities in the well services sector driving demand for its Drilling & Well Services (DWS) segment (ii) lower expenses due to cost saving initiatives.
• QoQ: Core net profit soared 48.4% in 3Q16 driven by stronger QoQ revenue on the back of strong DWS and chemical revenue due to improvement in activity. This is being partially offset by weaker JV earnings.
• YTD: 9M16 core earnings weakened by 37.6% YoY due to (i) lower DWS and chemical revenue as a result of slower activities (ii) lower gross margin arising from increased competition in the industry amid slowdown, and (iii) weaker JV contribution as a result of industry slowdown.
• We believe that there would not be any recognition in rent fee from the Tanjung Baram RSC in the next 2 years if low oil prices persist due to slower CAPEX recovery.
• Nevertheless, developments have turned slightly more positive with additional earnings expected to come from D18 water injection project in 2017.
• Instead of embarking on acquisition spree like last year, the group would streamline its existing business whereby some businesses acquired last year have duplications in terms of their operations. Cost savings are seen in recent quarters showcasing the group?s capability to keep its structure lean in such turbulent times in the market.

Risks

• Delays in contract disbursement.
• Execution risk.

Forecasts

• Maintained.

Rating

HOLD (↑)

• Recent sell down in the stock has, in our opinion, priced in the bleak earnings outlook of the group. However, we believe the potential recovery in earnings is not sufficient to justify further rerating of the stock at this juncture.

Valuation

• Upgrade to Hold with TP maintained at RM1.39 pegged to 10x CY17 PER.

Source: Hong Leong Investment Bank Research - 30 Nov 2016