Results

• Above expectations: 3Q17 core profit came in at RM0.8m, bringing 9M17 core loss to RM154.3m, above HLIB (-RM247m) and consensus (-RM217.2m).

Deviations

• Higher than expected rig utilisation.

Dividend

• None

Highlights

• YoY : Core profit of RM0.8m was posted against core loss of RM135.4m due to 7 working rigs in 3Q17 vs 1 working rig in 3Q16. Lower rig charter rate has partially offset the improvement.

• QoQ : Returned to profit from loss of RM51.0m as 7 rigs were utilised against 5 rigs in previous quarter.

• 9M17: Core losses narrowed significantly to RM154.3m against RM300.4m in 9M16 due to significantly higher rig utilisation (9M17: 61% vs. 9M17: 22%) with the commencement of new rig contracts during the year

• RM1.8bn proposed rights issue and issuance of RCPS-I have been completed on 25 th Oct 2017 with RM1.5bn being utilized to pare down borrowings. Assuming 3% interest cost, the group would realize circa RM45m cost savings per annum.

• On 6 th November 2017, the group has entered into new loan facilities comprising of: (i) US$145m 5-year & US$220m 10- year Commodity Murabahah Term Financing Facility-i; (ii) US$110m & RM110m Commodity Murabahah Revolving Credit Facility-i; and (ii) US$47m Islamic Trade Facility.

• These facilities would be utilised to refinance the remaining RM1.9bn worth of short term borrowings (post repayment from rights issue proceeds) and improve group’s debt maturity profit significantly, lifting overhang on the stock price.

• 2018 is expected to be a stronger year for the group with at least 60% utilisation anticipated based on current orderbook.

Risks

• Global recession hitting O&G price; High asset cash cost; Petronas’ further CAPEX and OPEX cut.

Forecasts

• Our FY17 loss projection is reduced to -RM158m from - RM247m to reflect the higher expected rig utilisation.

Rating

BUY

• Debt maturity overhang and rights issued completion would provide catalyst for the share price while earnings outlook appears to be more encouraging in 2018.

Valuation

• TP is increased to RM0.38 from RM0.32 as we raise target FY18 PBV multiple to 0.7x from 0.6x to reflect more positive prospects of the company.

Source: Hong Leong Investment Bank Research - 27 Nov 2017