Results

• Below expectations: 3Q17 core profit came in at RM3.3m, bringing 9M17 core profit RM11.6m, accounting for 36.4% of HLIB and 31.2% of street estimates.

Deviation

• Due to weaker than expected performance from Services segment on the back of weak work orders.

Dividends

• None.

Highlights

• YoY: Core profit plunged 59.1% mainly due to (i) drop services division revenue due to lower work order especially for drilling (ii) weaker trading division contribution due to non-extension of chemical contracts.

• QoQ: Profit almost tripled to RM3.3m underpinned by stronger services segment EBIT due to ramp up in work orders.

• 9M17: Core profit plunged 50.9% dragged by (i) slowdown in work orders for services division, and (ii) weaker volume achieved for the trading division upon non extension of chemical contract customers.

• We expect stronger 4Q17 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 4Q17.

• 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 could remain subdued in the medium term.

• Meanwhile, its Tanjung Baram RSC which has achieved first oil on Aug 15 but no meaningful earnings contribution would be felt before CAPEX is recovered (expected in 2019).

Risks

• Delays in contract disbursement.

• Execution risk.

Forecasts

• Cut FY17 by 40% to account for lower service revenue and margins.

Rating

HOLD

• While 2017 earnings outlook is gloomy, we believe recovery will be in place in 2018 with ramp up in works for services division expected for the contracts secured by the group in 1H17.

Valuation

• Downgrade to HOLD from BUY with TP maintained at RM1.51 pegged to unchanged FY18 PER of 11x.

Source: Hong Leong Investment Bank Research - 30 Nov 2017