Results

• Above expectations but within street: 3Q17 core net profit of the group came at RM135.7m, bringing 9M17 core net earnings to RM347.8m, above our expectations at 217% but deemed within consensus at 163% as 4Q17 is expected to be a loss making quarter.

Deviations

• Due to stronger than expected E&C work orders and margins.

Dividends

• None

Highlights

• YoY: 3Q17 core net profit plunged by 50% YoY due to (i) weaker E&C contribution driven by lower work orders and weaker contract replenishment (ii) weaker drilling division performance as more rigs come off charter in the quarter (50% of fleet idled in 3Q17) and (iii) lower Energy contribution due to lower production volume (3Q17: 0.8m bbls vs. 3Q16: 1.3m bbls) due to natural field production decline.
• QoQ: Core net profit surged 107.6% in 3Q17 compared to its preceding quarter mainly driven by doubling of E&C PBT due to significantly higher revenue as more T&I and fabrication contract commenced in the quarter. This was partially offset by lower sequential drilling and energy performance due to higher rig asset idling and lower oil produced respectively.
• Ytd: 9M17 declined by 61.7% in line with decline in PBT YoY underpinned by (i) weaker E&C performance due to lower scope of work done as a result on lower activities (ii) more idling of drilling rigs as more rigs came off charter in 9M17 and (iii) weaker Energy division performance due to lower average realized oil prices and lower oil production.
• Despite encouraging numbers reported so far, we are still anticipating a weaker FY18 due to (i) insufficient order book replenishment with current orderbook cover of RM4.9bn for FY18 and (ii) weaker expected drilling earnings with lower no. of rigs to be utilised in FY18.

Risks

• Execution risk, prolonged low oil price and delay in contract award.

Forecasts

• FY17 earnings are increased by 17% to account for higher E&C work scope and margins. However, FY18 is cut by 21% to RM248m to factor in weaker contribution from E&C and drilling.

Rating

HOLD (↔)

• While earnings are showing encouraging signs, we are of the opinion that FY18 would be an even more challenging year for the group due to declining orderbook with no clear prospects of significant replenishment in contracts amid tepid industry activities.

Valuation

• TP is maintained at RM1.57 based on unchanged 0.7x FY18 PBV. No near term catalyst anticipated in the near term with oil prices still uncertain while more clarity is needed on the gas pricing details of SK310 B15 development with 1st gas expected to be in 4QCY17.

Source: Hong Leong Investment Bank Research - 09 Dec 2016