Actual vs. Expectations

1H15 results came in below expectations with net profit of RM12.9m only making up 30.3% and 25.3% of our and consensus full-year forecasts, respectively.

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

2Q15 plunged 65.5% YoY to RM7.4m from RM21.5m last year due to lower overall vessel utilisation amid a slowdown in OSV market. While OSV revenue almost doubled to RM52.9m in 2Q15, EBIT margin weakened significantly to 22.9% from 34.0% last year possibly due to weaker daily charter rates. This is further worsened by loss of RM0.3m registered for its Underwater division amid weak subsea market segment.

On a QoQ basis, however, earnings surged 34.4% due to improvement in OSV revenue (+53.7% QoQ) as more vessels in the group are utilised compared to the preceding quarter due to higher work done by its clients. Underwater segment, on the other hand, was weaker QoQ due to lower subsea jobs executed in the quarter.

1H15 core net profit slumped 61.7% YoY to RM12.9m from RM33.8m last year due to lower average vessel utilisation (61% vs. 85% in last year) amid a weak OSV market. That aside, RM1.4m loss (from RM6.3m profit last year) from JV-owned highend vessels also contributed to the lower profit.

Outlook

With several contracts bagged in 1H15, its Underwater division’s earnings performance is expected to improve in the coming quarters.

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.

The 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 are 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 36.3%/21.5% by factoring in: (i) average JV-owned vessel utilisation to 55%/65% from 75%/80% previously to factor in weakness in the higher specification OSV market amid low oil price environment.

Rating

MARKET PERFORM maintained

Valuation

Our TP reduced to RM0.39 from RM0.51 previously as we pegged it to a lower target PBV of 0.5x from 0.6x previously, slightly lower than -1.5 s.d. below its 8-year mean to account for weaker prospect in the near term.

Risks to Our Call

Upside Risk: (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 - 26 Aug 2015