Highlights

Scomi Energy (SES)’s 1QFY14 analyst briefing was hosted by Shah Hakim Zain, Group CEO and attended by more than 15 fund managers and analysts. As in previous quarter, the company guided margin pressure in the next 2 quarters due to ramp up in initial cost for projects which have yet to register any contribution due to delay in commencing some of the drilling programmes in Malaysia.

Overall, the drilling activities in Malaysia and South East Asia region remain robust. The company expects to secure several job orders amounted to US$80m in the South East Asia region as well as in Turkmenistan in the short term to add to outstanding orderbook of RM5.1bn currently.

One of the accommodation barges remains idle as it continue to be under refurbishment, otherwise, the OSV segment would have performed better. The company proposed to build 2 accommodation barges, one to be delivered in 2H14 and another in 1Q15. The new barges are expected to fetch higher daily charter rate of US$23-25k as compared to current one at US$21k. Increase maintenance job on the aging platform will required more accommodation barges.

Comments

We came away from the visit positively given the huge growth potential from the DF and DWM business. The company has 6-7% market share in the Eastern market and expect to double it in next 3-5 years. We are positive on the company move to adopt asset light strategy and focus on core business as there is plenty of opportunity such as expanding existing market share and cross selling products to existing customers.

Going forward, the company will focus on the OSV segment which is synergistic to the drilling services business. We believe this is the right move given the sluggish outlook in coal business but robust ongoing activities in the OSV segment. SES also intends to build one set of tug and barge for the oil and gas industry through its JV with Freight management. SES’s management see opportunity for local players in this offshore construction segment as Petronas might need 40 tug and barges in next few years with only four locally flagged currently.

DWM will be the main booster for long term growth as legislation is trending towards zero discharge as adopted in Caspian and North Sea. We understand that the company is in the vanguard of the development of Microwave technology for the treatment of oil contaminated drill cuttings. This might be the game changer for the company.

Forecasts

Maintained.

Catalysts

• Potential to secure RM400m worth of contracts on top of its already huge orderbook of RM5.1bn.
• Contract win in DWM business given the potential addressable market size of US$2.1bn.
• A marginal field contract win.

Risks

Global recession hitting O&G price; Technology advancement; Relaxing of drilling waste management regulations.

Valuation

Upgrade from HOLD to BUY as share price has retraced with our unchanged TP of RM0.90 (based on unchanged 16x FY03/15 EPS of 5.6 sen/share) currently provides more than 20% upside.

Source: Hong Leong Investment Bank Research - 27 Aug 2013