Results

• Below expectations: 2Q18 core profit came in at RM36.9m, bringing 1H18 core net profit to RM42.9m, below HLIB (RM151m) and consensus (RM226m) full year estimates.

Deviations

• Due to weaker than expected drilling rig utilisation and rates.

Dividends

• None.

Highlights

• YoY: 2Q18 core net profit plunged 41.9% due to (i) weaker drilling rig utilisation upon contract expiry and weak charter rates, and (ii) weaker Energy division contribution due to cessation of Berantai RSC and lower barrels of oil lifted.
• QoQ: Core profit increased 5-fold due to significantly lower tax expenses on timing differences in tax recognition of certain of its subsidiaries. This was being partially offset by (i) weaker E&C contribution due to lower project margins and (ii) weaker drilling performance dragged by lower number of rigs utilised.
• 1H18: Net profit nosedived by 79.7% mainly underpinned by (i) loss registered for drilling division in 1H18 compared to profit in 1H17 due to lower number of rigs working (ii) lower energy division earnings contribution due to lower number of barrels lifted and (iii) higher interest costs.
• Drilling division is expected to remain weak for the rest of FY18 due to weak drilling activities.
• E&C division is expected to be stronger in FY18 due to higher orderbook replenishment and full contribution from all 6 Petrobras JV vessels.
• Despite the lower lifting volume expected, Energy division is expected to be flattish as the negative volume will be negated by stronger YoY crude oil prices.
• SK310 B15 gas project is expected to start contribution in 3Q18 as 1ST gas is expected to be achieved, which will partially negate the negative impact from Drilling division.

Risks

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

Forecasts

• FY18/19 core profit is cut by 32/62% to account for lower rig rates and utilisation.

Rating

HOLD (↔)

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

Valuation

• TP is lowered to RM1.56 from RM1.59 pegging FY19 PBV to 0.7x multiple post earnings revision.

Source: Hong Leong Investment Bank Research - 28 Sep 2017