1H18 results came below expectations dragged by stubbornly high fixed cost amidst weak drilling utilisation. Uncertain timing of contract award remained a concern to SENERGY even though tender enquiries were active. Post FY18-19 earnings cut of 39%-17%, we maintain MARKET PERFORM call on the counter with revised TP of RM1.55 pegged to lower FY19E PBV of 0.7x in view of potential impairment arising from drilling assets.

Below expectations. 1H18 core net profit of RM42.4m came below expectations at 30%/19% of our/consensus full-year estimates. The disappointment is largely due to weaker-than-expected contribution from drilling segment. No dividend was declared, as expected.

Better earnings QoQ. Sequentially, 2Q18 core earnings jumped 5.6x to RM36.9m thanks to lower tax expense (-94% QoQ) as a result of lower tax provisioning and higher tax credit for certain subsidiaries offsetting weaker operational performance from all segments. Note that drilling segment slipped into operating losses of RM85.0m in 2Q18 from RM20.8m profit in 1Q18 marred by lower number of rigs working (6 rigs working in 2Q18 vs 7 rigs in 1Q18) while contributions from JV and associates fell 33% QoQ largely due to an unexpected provision made for equipment maintenance for the PLSV operating in Brazil.

Core profit halved YoY. On YoY basis, SENERGY’s earnings decreased by 51% from RM75.0m, mainly attributable to loss-making drilling segment (6 rigs vs 10 rigs in 2Q17) and weaker JV & associate (-44% YoY) dragged by unexpected provision and weaker earnings from Sapura Acergy. However, it was cushioned by better performance from E&C segment (+6% YoY), lower taxation (-94% YoY) and stronger energy segment (+2.7x YoY). Energy segment’s earnings improvement was largely helped by lower opex and higher average lifting oil prices at USD50/bbl vs. USD48/bbl in 2Q17 despite lower production of 0.8mmboe vs 1.2mmboe in 2Q17. Cumulatively, SENERGY’s core profit also declined by 77% YoY to RM42.4m, no thanks to poor performance from drilling segment masking better contribution from E&C segment (+55% YoY) and energy division (+5.4x YoY).

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 deteriorated to RM15.1b from RM17.0b in 1Q18. The company expects RM3.2b to be recognised in 2H18 and RM3.4b to be recognised FY19, where RM1.0b-2.0b is attributable to its JCE.

Slashed FY18-19E earnings by 39-17% to RM86.2-141.2m factoring lower contribution from drilling segment as a result of higher-thanexpected fixed cost.

Keep MARKET PERFORM call. Following earnings cut, we maintain MARKET PERFORM call on the stock with lower TP of RM1.55 (from RM1.80 previously) pegged to lower PBV of 0.7x from 0.8x in view of potential impairment arising from drilling assets and uncertain timing of contract award despite active bidding. Such valuation is in line with current sector valuation as SENERGY is often viewed as a proxy to oil prices given its position as an integrated service player as well as an oil producer. Downside risks to our call: (i) Unexpected further sharp drop in oil prices, and (ii) unexpected delays of projects on hand.

Source: Kenanga Research - 28 Sept 2017