Results

In line: 1QFY14 Core profit registered RM24m, making up 26.6% and 24% of HLIB and consensus full-year estimates, respectively.

Deviations

None.

Highlights

QoQ, 1QFY14 Core profit increased 17% qoq due to higher profit contribution at oilfield services and improved marine revenue due to the higher tonnage transported and increased utilization rates of vessels. Better oilfield segment was due to higher revenue from South-East Asian markets particularly Malaysia as well as from West Africa due to increased drilling activities. The company expects to secure several job orders in the South East Asia region as well as in Turkmenistan in the short term to add to outstanding orderbook of RM5.1bn currently.

On the coal transport business, the company will continue to dispose surplus vessels to optimize fleet and cost levels. Going forward, the company will focus on the OSV segment which is synergistic to the drilling services business. The company intends to acquire 3 AHTS (BHP: 5- 6k) and 1 accommodation barge.

In the long run, we still like the company as it is one of the top beneficiaries in the drilling sector given the huge prospect from drilling fluid (DF) and drilling waste management business (DWM).

DWM will be the main booster for long term growth as legislation is trending towards zero discharge as adopted in Caspian and North Sea. In North Sea, the DWM business size is 10-15% larger than DF. Margin for DWM is also more lucrative with gross profit margin of more than 30% vs. DF at 20-26%.

DWM now only contribute to circa 5% of SES’s RM5.1bn orderbook. According to DWL Research, the addressable drilling waste market size for SES is estimated to be US$2.1bn in 2012. This market includes Asia, Russia, the Middle East and West Africa. Thailand, Mynamar, Indonesia and Malaysia are the core market to look at given the huge capex spending on exploration and production.

Forecasts

Unchanged pending analyst briefing later today.

Catalysts

• Potential to secure RM400m worth of contracts on top of its already huge orderbook of RM5bn.
• Contract win in DWM business given the potential addressable market size of US$2.1bn.

Risks

Global recession hitting O&G price; Technology advancement; Relaxing of drilling waste management regulations.

Valuation

Despite current TP of RM0.90 (based on 16x FY03/15 EPS of 5.6 sen/share) provide more than 20% upside, we maintain our HOLD call pending more management guidance from analyst briefing later today.

Source: Hong Leong Investment Bank Research - 26 Aug 2013