Despite the sequentially narrowed losses, 3QFY21 results still missed expectations given poor rig utilisation. Local demand for jack-up rig is still expected to remain weak, with only two of the group’s six rigs having contracts at hand going into FY22. Maintain UP with TP of RM0.10.

9MFY21 missed expectations. 9MFY21 core net loss of RM179m completely missed expectations against our full-year loss forecast of RM85m, and consensus of RM111m, due to the poor rig utilisations. No dividends were announced, as expected.

Still in the red. QoQ, 3QFY21 core net loss managed to narrow 37%, largely thanks to the higher rig utilisation of 51% versus 38%. However, YoY, losses widened over 7x due to the weaker rig utilisation of 51% versus 60%. Cumulatively, 9MFY21 plunged into the red, from a core profit of RM5.5m, similarly on the back of a weaker rig utilisation of 39% versus 68%.

Utilisation outlook remains weak. In line with Petronas’ existing activity outlook, local demand for jack-up rigs is still expected to remain weak in the coming 1-2 years. Going into FY22, only two out of a total of six rigs available have jobs on hand. Conversely, on a more encouraging note, after the insurance claims following the sinking of Naga 7, the group managed to reduce its borrowings by 40% QoQ, with its net-gearing now standing at 0.2x, from 0.4x in the previous quarter. We believe the improved balance sheet and smaller fleet will better help the group to weather through the current challenging market conditions while awaiting a recovery.

Maintain UNDERPERFORM, with a lowered TP of RM0.10 (from RM0.13 previously). In light of the continued losses and weak rig utilisation outlook, we have lowered our ascribed valuation down a notch to 0.4x (from 0.5x previously) – in line with 1SD below the stock’s mean valuation. Post results, we have also widened our FY21E/FY22E losses by 2.2x/4.5x, after lowering our rig utilisation assumption to 45%/50% (from 50%/65% previously), coupled with weaker margins assumptions.

Risks to our call include: (i) unexpected recovery in utilisation, (ii) stronger-than-expected charter rates, (iii) higher-than-expected margins, and (iv) weaker-than-expected Ringgit.

Source: Kenanga Research - 30 Nov 2021