· Back on the radar. Scomi Energy Services Bhd (SCOMIES; formerly known as Scomi Marine Bhd) has been transformed into a profit-making entity after undergoing a restructuring exercise in 2012. Post its restructuring phase, the share price climbed to a high of RM1.17 in April last year riding on the oil and gas sector boom. However, following the plunge in oil prices, the share price dwindled more than 75% from its peak and recorded YTD loss of 53%, reflecting the poor investment sentiment towards the drilling sub-segment in oil and gas industry. At current valuation, we believe it is worth a second look given its intact fundamentals remain.

· Oilfield services player with diversified international presence. SCOMIES mainly supplies chemical products to shorten the drilling duration and rejuvenate wells, offers products and services to 23 countries across different regions, including Asia, Middle East, Africa and Europe. As of 1Q16, SCOMIES’ overseas contribution increased to 83% of its total revenue from 77% recorded in FY2014. Going forward, we believe the welldiversified multiple countries strategy allows contribution from active markets such as Indonesia, India and Middle East to offset weaker markets, including Malaysia.

· Widening product range to boost top line. Apart from its core product drilling fluid, SCOMIES aims to expand into new types of products such as production chemicals and completion chemicals for existing clients. For instance, we are guided that the Indonesian market alone is potentially worth c.USD750m in which SCOMIES provides a combination of six solutions to their contracted customers. We believe SCOMIES stands a good chance to secure more contracts leveraging on its relationship with existing clients.

· Sizeable orderbook providing earnings visibility. As of 1QFY16, SCOMIES’ outstanding orderbook stood at RM3.9b to be recognised over the next 3-4 years. We came to understand that the bidding market remains active in spite of potential project delays. SCOMIES has bagged contracts worth USD140m in 1QFY16. The company should be able to secure at least USD60m from the pending bids of up to meet our USD200m contract replenishment assumption for FY16.

· Expecting Ophir to contribute in 2HCY16. Petronas has recently approved the revised field development plan (FDP) for the Ophir Oil Field. The revised FDP allows SCOMIES to operate the field at a breakeven level of USD55/bbl and will be developed via three production wells, a well head platform and leased Floating Production Storage and Offloading (FPSO) vessel. The management is expecting to hit the first oil in July 2016 (2Q17) if everything goes well. To recap, SCOMIES (30% interest) together with Octanex Pte Ltd (50%) and Vestigo Petroleum Sdn Bhd (20%) secured a small field with seven-year risk service contract to develop the marginal oilfield located offshore Peninsular Malaysia in June last year. We have yet to factor in earnings contribution from Ophir in our projections.

· Asset light model with reducing borrowings. While SCOMIES is not entirely immune to the oil and gas capex slowdown, its asset-light model helps to weather the challenging environment compared to other peers in the industry. Furthermore, the gradual repayment of bonds also reduces its gross gearing (total-debt-to-assets) from 31.4% in FY13 to 22.0% in 1QFY16. By freeing up its debt capacity, SCOMIES is poised to seek for more growth opportunities either organically or inorganically especially when asset prices are relatively cheaper in the downturn.

· Not-Rated with FV of RM0.27/share. We value the stock at RM0.27/share based on 8.0x FY16E PER, in line with FBMSC’s valuation of 7.6x, similar to its oilfield services peer, UZMA (PER of 8.0x). Further re-rating could arise should the Ophir project start to contribute positively to the company, earliest by July 2016.

Source: Kenanga Research - 22 Sep 2015