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This article first appeared in The Edge Financial Daily, on December 3, 2015.

 

Scomi_FD_3Dec15_theedgemarketsScomi Energy Services Bhd
(Dec 2, 25 sen)
Maintain hold with an unchanged target price (TP) of 25 sen:
Scomi Energy’s oilfield service revenue fell 21% year-on-year (y-o-y) and 12% quarter-on-quarter (q-o-q) due to a drop in rig count and lower activities in Malaysia, Myanmar and Indonesia.

Contribution from Malaysia continued to weaken from 22% to 13% q-o-q as rig counts reduced from five to three rigs currently. Q-o-q, the marine segment doubled its losses from RM2.7 million to RM5.7 million on lower utilisation from the offshore support vessel (OSV) segment but partly offset by better contribution from the coal segment. Without the losses from the OSV, the coal segment was profitable at RM6 million in the quarter. We expect the marine segment to remain in losses in subsequent quarters, given the bleak outlook for OSV segment.

Overall, earnings before interest and taxes margin improved from 7.1% to 8.9% as cost optimisation efforts continued to prevail. On its Ophir marginal field, the first oil target was delayed to fourth quarter of calendar year 2016 (4QCY16). We believe Ophir marginal field will still proceed, and we have assumed six months contribution in financial year ending March 31, 2017 (FY17).

To mitigate the drop in drilling activities, Scomi Energy expanded its product range from drilling fluid to production chemical and maintenance services. In terms of the market, Scomi Energy sees strong demand from the Middle East, Russia and Argentina. This will help to cushion the slowdown in activities in Malaysia and Nigeria.

Balance sheet remains solid with net gearing at 0.2 times and debt/earnings before interest, taxes, depreciation and amortisation (Ebitda) ratio of less than two times. Given its strong cash flow generation with Ebitda per annum of about RM200 million, we do not rule out the possibility of Scomi Energy having to start paying out dividends.

Assuming a 50% payout ratio (about a RM40 million dividend payout), we can expect potential dividend yield of 6.7% based on the current share price. Order book remains sizeable at RM4 billion, but we expect progressive revenue recognition from order book to slow down as oil companies are reducing capital expenditure and drilling campaigns.

We maintain our “hold” call with a unchanged TP of 25 sen based on unchanged eight times calendar year 2016 price-earnings ratio. — Hong Leong IB Research, Dec 2

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