Results

• Within expectations: 1Q17 core net profit came in at RM7.5m, accounting for 18.5% of HLIB forecast and 18.3% of consensus. It is deemed within expectations as we expect much stronger 2H17 performance.

Deviation

• None.

Dividends

• None.

Highlights

• YoY: Core net profit surged 43.5% in 1Q17 driven by (i) better profitability from the Services division contributed by D18 on higher EBIT margin, and (ii) lower tax rate due to MIDA allowances.
• QoQ: Core net profit posted 76.2% jump mainly driven by (i) higher margin achieved in Services division (due to D18 contribution) and (ii) higher tax incentive. However, it was partially offset by weaker Chemical topline and EBIT due to non-extension of certain contracts executed in 4Q16.
• Looking forward, the group is expected to post stronger profit for its Services segment in 2H17 as its new contracts secured earlier this year would start contributing (HWU contract for Murphy & wireline logging contract for Petronas Carigali) spanning 2-3 years.
• Current orderbook of the group is estimated to be at RM2bn, implying 3.5x orderbook cover ratio. While it appears to be significant, actual core earnings of the group is dependent on the final work orders issued during contract tenure as it is based on call up from the clients.
• For its Trading division, performance is expected to be subdued in 2017 due to tepid demand for oilfield chemicals while pricing in the industry has become more competitive.

Risks

• Delays in contract disbursement.
• Execution risk.

Forecasts

• Maintain forecast.

Rating

BUY (↑ )

• 2017 is a year to look forward to for the group with full year contribution expected from D18 coupled with anticipated improvement in Services division backed by its huge orderbook.

Valuation

• Upgrade to BUY with TP raised to RM2.03 from RM1.70 based on unchanged 12x PER as we roll forward our valuation to FY18.

Source: Hong Leong Investment Bank Research - 25 May 2017