1QFY22 core loss narrowed sequentially to RM60m which is deemed as above expectations; helped by higher projects progression, drilling rig utilisation and oil prices. Nonetheless, the quarter was still partially dragged by a non-recurring refinancing cost and other pandemic-related impacts. As such, we are hopeful of a recovery ahead, backed by recognition of the group’s ~RM12b order-book. Maintain OP and TP of RM0.21, given its discounted valuations.

1QFY22 results deemed as above expectations. 1QFY22 core net loss of RM60m (arrived after excluding forex and gains on disposals) is deemed to have come in above expectations, against our FY22E loss forecasts of RM249m and consensus of RM57m (although we note that several analysts in the market may differ in their computation of core figures, thus making consensus estimates only partially comparable). This is in anticipation of stronger quarters ahead, as this quarter recognised higher overheads (e.g. refinancing-related expenses, Covid- 19-related costs) which we believe may subside over the coming quarters. No dividends were announced, as expected.

Sequential narrowing of losses. QoQ, core net loss narrowed by more than half, thanks to: (i) higher projects progression in engineering and construction (E&C), (ii) improved drilling rig utilisation of 7 versus 6 last quarter, and (iii) higher oil prices lifting its exploration and production (E&P) segment. The better business performances managed to offset higher finance costs, arising from one-off refinancing costs. YoY, core loss tripled. While the quarter had (i) E&P benefitting from higher oil prices, and (ii) drilling segment posting higher rates from its Africa operations, the quarter was nonetheless still dragged by (i) E&C seeing slower works coupled with Covid-19-related expenses of ~RM40m, and (ii) aforementioned refinancing-related expenses amounting to ~RM45m.

In midst of a gradual recovery. With this quarter’s bottom-line partially dragged by one-off refinancing expenses, we are hopeful that upcoming quarters could produce better numbers, especially in 2HFY22, backed by recognition of the group’s order-book of RM11.8b, with RM29b worth of bids already submitted globally. The successful refinancing exercise also saw ~RM3b short-term debt being reclassified as long-term, thus significantly reducing the group’s immediate borrowings risk for the time being. Over the longer-term, the group is also now aiming of having a sizable exposure towards energy transition by the year 2026.

Maintain OUTPERFORM, with unchanged TP of RM0.21 – pegged to 0.4x PBV, close to mean valuations. Post results, we narrowed our FY22E/FY23E losses by 26%/15% after factoring in stronger E&C order-book recognition and higher crude oil price assumption for its E&P segment.

Our OUTPERFORM call is premised on the group’s long-term fruition of its ongoing corporate and financial restructuring, and steeply discounted valuations, trading at 0.2x PBV.

Risks to our call include: (i) deterioration in corporate governance, (ii) cost escalation, and (iii) failure to secure adequate order-book replenishment.

Source: Kenanga Research - 30 Jun 2021