Results

• Below expectations: Reported 1Q18 core loss of RM18.6m, which is below HLIB (RM285m profit) and street estimate (RM312m profit).

Deviations

• Weaker than expected drilling rig utilisation and rates as well as higher than expected effective tax rate.

Dividends

• None.

Highlights

• YoY: 1QFY18 core loss was posted against profit of RM146.6m in 1QFY17. This was mainly underpinned by (i) lower PBT from drilling segment due to expiry of contracts in the quarter and lower charter rates and (ii) higher effective tax rates caused by timing differences of taxes for its subsidiaries across different tax jurisdictions. Nevertheless, E&C segment reported higher PBT due to higher work order and higher JV contributions due to higher no. of JV vessels worked.
• QoQ: Core net loss was reported against core profit due to (i) higher effective tax rate due to timing differences (ii) lower Energy division contribution due to drop in lifting volume and (iii) lower JV contributions due to seasonally lower T&I activities.
• Drilling division was weak in 1QFY18 with only 7 rigs working, 1 rig idle and 8 more rigs cold stacked. Rig earnings would be weaker in the quarters ahead with 2 more rigs coming off charter in 2Q18 and 3Q18. Thus, we expect a significantly weaker FY18 for drilling segment.
• E&C segments expected to be stronger in FY18 due to higher orderbook replenishment and full contribution from all 6 Petrobras JV vessels.
• Despite lower lifting volume expected, Energy division is expected to fare better in FY18 due to better than expected realized crude prices.

Risks

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

Forecasts

• FY18/19/20 core profit forecast is cut by 47/17/13% to account for lower rig rates and utilisation. .

Rating

SELL(↓ )

• FY18 is expected to be weaker as the recovery in Energy and E&C divisions would not be sufficient to offset the weakness in drilling.

Valuation

• TP is cut to RM1.59 from RM2.01 as we roll forward our valuation to FY19 PBV and peg it to a lower PBV of 0.7x from 0.9x to account for potential further write down in drilling assets due to drop in rig utilisation.

Source: Hong Leong Investment Bank Research - 20 Jun 2017