This article first appeared in The Edge Financial Daily, on September 23, 2015.
Scomi Energy Services Bhd
(Sept 22, 27 sen)
Not rated with a fair value of 27 sen: Scomi Energy Services Bhd (Scomies) has been transformed into a profit-making entity after undergoing a restructuring exercise in 2012. Its share price climbed to a high of RM1.17 in April last year, riding on an oil and gas (O&G) sector boom. But following a plunge in oil prices, the share price has dwindled more than 75% from its peak and recorded a year-to-date loss of 53%, reflecting poor investment sentiment towards the drilling subsegment. At the current valuation, we believe it is worth a second look, given that its fundamentals remain intact.
Scomies mainly supplies chemical products to shorten drilling durations and rejuvenate wells, offering products and services to 23 countries in Asia, the Middle East, Africa and Europe.
As of the first quarter of financial year 2016 (1QFY16), Scomies’ overseas contribution increased to 83% of its total revenue from 77% recorded in FY14. Going forward, we believe its well-diversified multiple-country strategy allows contributions from active markets, such as Indonesia, India and the Middle East, to offset the weaker markets, including Malaysia.
Scomies aims to expand into new types of products, such as production and completion chemicals.
We are guided that the Indonesian market alone is potentially worth US$750 million (RM3.22 billion), in which Scomies provides a combination of six solutions to customers. We believe it stands a good chance to secure more contracts via relationships with existing clients.
As of 1QFY16, Scomies’ outstanding order book stood at RM3.9 billion. We came to understand that the bidding market remains active in spite of potential project delays.
Scomies bagged contracts worth US$140 million in 1QFY16. It should be able to secure at least US$60 million from pending bids to meet our US$200 million contract replenishment assumption for FY16.
Petroliam Nasional Bhd has recently approved the revised field development plan (FDP) for the Ophir Oil Field. The revised FDP allows Scomies to operate the field at a break-even level of US$55 per barrel and will be developed via three production wells, a well head platform and a leased floating production storage and offloading vessel.
The management expects to hit the first oil in July 2016 (2QFY17).
To recap, Scomies (30% interest) together with Octanex Pte Ltd (50%) and Vestigo Petroleum Sdn Bhd (20%) secured a small field with a seven-year risk service contract to develop a marginal oilfield located off peninsular Malaysia in June last year. We have yet to factor in earnings contributions from the Ophir project in our projections.
While Scomies is not entirely immune to the O&G capital expenditure slowdown, its asset-light model helps to weather the challenging environment. Gradual repayment of bonds also reduced its gross gearing (total-debt-to-assets) from 31.4% in FY13 to 22% in 1QFY16. By freeing up its debt capacity, Scomies is poised to seek more growth opportunities, especially when asset prices are relatively cheaper.
We value the stock based on eight times FY16 price-earnings ratio (PER), in line with FBMSC’s valuation of 7.6 times, similar to its oilfield services peer Uzma (PER of eight times).
Further rerating could arise should the Ophir project start to contribute positively to the company, earliest by July 2016. — Kenanga Research, Sept 22