2QFY20 recorded unexpected losses, dragged by lower topside maintenance work orders as a result of operational disruptions caused by lockdown measures, coupled with poorer vessel utilisations. Moving forward, we expect some recovery in 2HFY20, in tandem with the mild rebound of crude oil prices coupled with easing of lockdown, but given weaker activity levels overall, impairment risks still loom. Maintain MP with lowered TP of RM1.20

1HFY20 below expectations. 1HFY20 recorded core net profit of RM12m (adjusted for unrealised forex losses), coming in below expectations at merely 9% each of our and consensus full-year earnings forecasts, due to weaker-than-expected work orders for its topside maintenance, and poorer-than-expected marine charters. Particularly, this quarter (2QFY20) deteriorated sequentially and plunged into losses, despite typically being a seasonally stronger quarter, mired with operational disruptions caused by lockdown measures. No dividends were announced, as expected.

Quarter plunged into losses, disrupted by MCO. The quarter plunged into core loss of RM1.6m, versus core profit of RM53.5m in 2QFY19, as lockdown measures due to the Covid-19 pandemic caused significant disruptions in operations and resulted in lower work orders received for its topside maintenance. Additionally, the quarter also recorded a lower vessel utilisation of 52%, versus last year’s 81%. Sequentially, results also deteriorated QoQ from core profit of RM13.6m last quarter, dragged similarly by lower topside maintenance work orders coupled with poorer vessel utilisation (52% vs 55%). Cumulatively, 1HFY20 core earnings plunged 75% YoY, despite the year having a good start in 1QFY20, dragged by poorer performance in the 2QFY20 from poorer topside maintenance and marine charter. Vessel utilisation in 1HFY20 was at 53%, versus 1HFY19 of 61%.

Expecting some rebounds in 2HFY20. In tandem with the mild rebound of crude oil prices, and easing of lockdown measures, work orders received should see some uptick going into 2HFY20. The company’s order-book still stands at ~RM3.8b. However, we still anticipate a huge drop-off from prior years’ levels, especially considering that FY19 was a record-profit year, as recovery would be slow and gradual. As such, we also do not discount the possibility of impairment exercises later in the year, given the overall drop in activity levels in the sector.

Maintain MARKET PERFORM. Post-results, we slashed FY20/21E earnings by 59%/50%, accounting for lower topside maintenance work orders and vessel utilisations. Following so, our TP is also skimmed to RM1.20 (from RM1.30 previously) – pegged to 0.8x PBV, which is roughly -1SD from its mean valuation.

Overall, it lacks catalyst at the moment given the overall weaker activity levels within the upstream space, coupled with looming impairment risks. Re-rating catalyst may re-emerge upon a visible recovery in the oil and gas sector, prompting improvements in offshore activity levels.

Risks to our call are: (i) stronger-than-expected work orders, (ii) higher-than-expected margins, and (iii) higher-than-expected vessel utilisation.

Source: Kenanga Research - 24 Aug 2020