Period

1Q15

Actual vs. Expectations

1Q15 results came in below expectations with net profit of RM8.6m only making up 14.7% and 14.4% of our and consensus full-year forecasts.

The variance to our forecast is largely due to lower-than-expected OSV vessel utilisation amid vessel oversupply and rate cuts by Petronas.

Dividends

No dividend was declared as expected. Key

Results

Highlights

1Q15 core net profit plunged 30.0% YoY due to lower vessel utilisation driven by weak local OSV market. Marine revenue dipped by 48.4% YoY but EBIT remained flattish YoY due to lower vessel operating costs, possibly driven by a lesser number of chartered-in vessels. Underwater revenue climbed two-fold to RM37.3m YoY due to higher volume of subsea jobs done in the quarter. As a result, group EBIT margin improved to 15.2% in 1Q15 from 12.8% in 1Q14.

On a QoQ basis, however, earnings surged 88.2% from RM4.6m to RM8.6m despite a 31.5% QoQ drop in top line due to lower marine operating costs incurred, resulting in better operating margins QoQ. This is despite a 63.1% drop in Offshore Marine Services revenue due to lower vessel utilisation. Underwater Services division, on the other hand, improved from a loss of RM3.8 to RM3.1m profit in 1Q15 driven by stronger revenue from subsea jobs.

Outlook

To-date, there are no signs of Inspection, Repair and Maintenance (IRM) and pipelay subcontract awards.

The group is hopeful of securing a job for 1MAS S-300, its pipelay accommodation barge co-owned with Swiber in 2H15 to rejuvenate the prospects of its Underwater division.

The group has announced the purchase of a Diving Support Vessel (DSV) on 24th March 2015 to replace its chartered-in DSV currently working for a subsea job, indicating more efficient cost structure for its subsea segment in the future.

OSV segment is expected to be challenging in 2015 given the current adverse movement in crude oil prices. On top of that, existing charter contracts by the local OSV players is not expected to be spared from the renegotiation of rates by Petronas.

No official announcement of specific contracts from the Umbrella Contract secured earlier this year has been made, but we anticipate more clarity in 2H15 when the market stabilizes.

We believe the impact should be more severe on vessels under high DCRs (>USD2.2/bhp).

Change to Forecasts

We cut our FY15/16E earnings by 27/29% by factoring in: (i) average vessel utilisation from 80% to 70% and lower JV DCR (USD1.79/day from USD2.10/day ) for FY15, and (ii) lower DCR USD1.93/day from USD2.10/day and 75% utilisation rate from 80% previously for FY16.

Rating

UNDERPERFORM maintained

Valuation

Our TP is increased slightly to RM0.61 from RM0.57 previously as we roll over our valuation to CY16 BVPS pegged to 0.7x PBV, which is close to its 1.5 SD below its 8-year historical average multiple due to near-term weakness in OSV charter market.

Risks to Our Call

(i) Better-than-expected OSV and underwater services division, (ii) Higher-than-expected margins on vessels, and (iii) faster than expected recovery in OSV market.

Source: Kenanga Research - 22 May 2015