Results

• Below expectations: Reported 2Q17 core loss of -RM1.2m, dragging down 1H17 core profit to RM6.3m, accounting for 14.3% of HLIB and 14.5% of street estimates.

Deviation

• Due to weaker than expected performance from Services segment.

Dividends

• None.

Highlights

• YoY: Core loss of RM1.2m was recorded against profit of RM7.5m in 2Q16 mainly due to (i) weaker Services division performance caused by decline in drilling services and overall work order for production services; and (ii) weaker Trading segment due to non-extension of certain chemical contracts.

• QoQ: Core loss was reported against core profit of RM10.4m in 1Q17 mainly underpinned by weak Services division due to decline in work orders. This was partially offset by stronger Trading operating margins.

• 1H17: Core profit plunged 59.5% caused by (i) higher finance cost; (ii) weaker Services division due to lower activity; and (iii) non-extension of certain Chemical division contracts.

• Outlook: We expect stronger 2H17 due to commencement of HWU contracts secured back in Feb 2017. The current orderbook of the group stands at RM2bn and we expect work orders to pick up in 2H17.

• However, major part of the group’s orderbook is on call up basis and the group’s recovery hinges on the actual demand of client which may be subdued in the medium term.

• Meanwhile, its Tanjung Baram RSC, which has achieved first oil on Aug 15, is not expected to have meaning earnings contribution until 2019, when its CAPEX has been recovered.

Risks

• Delays in contract disbursement.

• Execution risk.

Forecasts

• Cut FY17/18/19 forecast by 21.5/19.0/14.5% to account for weaker Services division earnings due to lower expectation of activities.

Rating

• HOLD

• While earnings are still expected to recover? gradually, we believe it would be slower than expected earlier due to subdued oil market outlook.

Valuation

• Downgrade to HOLD with TP reduced to RM1.51 from RM2.03 upon earnings cut pegged to lower FY18 PER at 11x (from 12x) due to more bearish outlook.

Source: Hong Leong Investment Bank Research - 25 Aug 2017