We upgrade SENERGY’s FY18 earnings by 10% following its better-than-expected 4Q17 results. Moving forward, earnings are likely to be underpinned by its stable JV earnings from Brazil and maiden inflow from B15 gas project, offsetting weakness in E&C and drilling segment. The company, in our view, remains the best proxy to trade the volatility in oil prices and ride on the gradual recovery of the sector. Maintain OUTPERFORM on the stock with higher TP of RM2.24/share peg to 1.0x FY19 PBV. Above expectations. SENERGY (previously known as SKPETRO) recorded FY17 core net profit of RM242.0m which is above our full-year estimate by 14%, but within consensus at 97% of estimate. The positive deviation is largely due to stronger-than-expected contribution from the E&C segment as well as its JV earnings. A 1.0 sen DPS was declared as expected.

Operating losses in 4Q17. Sequentially, 4Q17 earnings slumped into operating losses of RM101.4m in 4Q17 (after stripping off: (i) impairment of RM282.7m, and (ii) unrealised forex gain of RM180.0m) from a net profit of RM158.1m in 3Q17 in tandem with 18% decrease in revenue due to weaker contribution from E&C and drilling segment. However, it was partially cushioned by stronger energy segment. Energy segment’s earnings contribution strengthened to RM72.8m from RM1.8m QoQ due to higher average lifting oil prices at USD51/bbl vs. USD45/bbl and higher production of 1.0mmboe vs. 0.8mmboe in 3Q17.

FY17 core profit plunged 66% YoY. On YoY basis, despite a 19% drop in revenue led by lower contribution from drilling segment, SENERGY managed to narrow its losses from RM135.9m in 4Q16 thanks to stronger contribution from energy segment resulting from better oil prices (USD37/bbl in 4Q17) and higher JV and associate earnings from six operating PLSVs chartered to Petrobras, offsetting weakness arising from cessation of Berantai RSC. Cumulatively, core net profit fell 66% to RM242.0m from RM714.5m in FY16 due to weakening revenue and margins for all three segments (overall PBT margins of 8.0% in FY17 vs. 19.3% in FY16).

Job market landscape remains competitive. We are guided that job bidding market remains competitive with price war expected to persist. SENERGY’s latest order-book weakened slightly to RM16.7b from RM17.2b in 3Q17. The company expects RM5.5b and RM3.1b to be recognised in FY18 and FY19, respectively, where RM2.0b/annum is attributable to its JCE.

Upgrade FY18 earnings. Following stronger-than-expected earnings in FY17, we upgrade our FY18E earnings by 10% to RM221.2m assuming higher contribution from PLSVs chartered to Petrobras. Meanwhile, FY19E earnings of RM213.8m is introduced, a 3% drop YoY assuming: (i) full contribution of B15 project, (ii) 50% utilisation from drilling segment, and (iii) total order-book replenishment of RM4.5b.

Keep OUTPERFORM call. Following earnings upgrade, we decide to roll over our valuation base to FY19 and thus, our TP is increased to RM2.24 pegged to 1.0x FY19 PBV, higher than the current sector valuation of 0.7x PBV. We believe a higher premium is warranted in view of: (i) its competitive advantage in winning local and overseas contracts continuously, and (ii) its long-term positioning as an integrated service player as well as a gas producer with decent gas reserve.

Downside risks to our call: (i) Unexpected further sharp drop in oil prices, and (ii) unexpected delays of projects on hand.

Source: Kenanga Research - 03 Apr 2017