A barely breakeven quarter for SENERGY with E&C segment expected to be the main earnings driver in the next few quarters amidst weak drilling utilisation and oil prices. Despite improving tender enquiries, timing of contract award remains uncertain pending approval from clients. With this disappointing set of results, we downgrade the stock to MARKET PERFORM call with revised TP of RM2.00 pegged to lower FY19E PBV of 0.9x in view of potential impairment arising from drilling assets. Below expectations. 1Q18 core net profit of RM5.4m came below expectations at 3%/2% of our/ consensus full-year estimates. The disappointment is largely due to weaker-than-expected contribution from the drilling segment. No dividend was declared, as expected.

Small profit in 1Q18. Sequentially, 1Q18 earnings returned to the black from operating losses of RM101.4m in 4Q17 thanks to stronger contribution from E&C and drilling segment. However, it was partially offset by weaker energy segment as well as weaker contribution from JV and associates led by SapuraAcergy. Energy segment?s earnings contribution dropped 66% QoQ to RM24.6m due to lower production of 0.8mmboe vs 1.0mmboe in 4Q17 despite higher average lifting oil prices at USD52/bbl vs. USD51/bbl in 4Q17.

Core profit plunged 95% YoY. On YoY basis, SENERGY?s earnings plunged 95% from RM110.3m, mainly attributable to higher taxation expense (+4.2x YoY), weaker contribution from drilling segment (-86% YoY) as a result of lower number of rigs working (7 rigs working in 1Q18 vs 10 rigs in 1Q17). However, it was also cushioned by better performance from E&C segment (+1.3x YoY) and higher contribution from JV and associate. Note that the earnings from PLSVs chartered to Petrobras was much lower in 1Q17 as Sapura Jade and Sapura Esmeralda only commenced operations in February and April last year, respectively.

Job market landscape remains competitive. We are guided that job bidding market remains competitive but has improved over the past few months. However, the timing of contract award is still uncertain pending approval from the oil majors. Its latest order-book position improved slightly to RM17.0b from RM16.7b in 4Q17. The company expects RM4.9b to be recognised in the remaining three quarters of FY18 and RM3.4b to be recognised FY19, where RM1.6b-2.0b are attributable to its JCE.

Slashed FY18-19 earnings. Going forward, we expect E&C segment to be the main earnings driver for SENERGY. Meanwhile, we lower our FY18-19E earnings by 36%/20% to RM141.3m/RM170.9m assuming lower rigs utilisation of 50-45% (from 60-50% previously) as well as lower charter rates.

Downgrade to MARKET PERFORM call. Following earnings cut, we downgrade the stock to MARKET PERFORM call with lower TP of RM2.00 (from RM2.24 previously) pegged to lower PBV of 0.9x from 1.0x in view of potential impairment arising from drilling assets. However, such valuation is still higher than the current sector valuation of 0.7x PBV premised on 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 - 20 Jun 2017