Results

• Below expectations: 4QFY15 losses amounted to RM71.4m (excluding RM337.7m impairment), bringing 12MFY15 loss to RM58.7m. It was below ours (RM10m loss) and consensus forecast (RM19m profit).

Deviations

• Mainly due to lower charter coupled with downtime incurred by plunge in rig utilisation post contract expiry in 1H15.

Highlights

• 4Q15 core earnings swung into loss of RM71.4m vs. RM71.3m profit in 4Q14. This is mainly attributable to deterioration of DCR amid low oil prices and lower rig utilisation due to non-extension of rig contract (Naga 2 and Naga 6 expi red in 2Q15). On the other hand, 2 new jack ups (Naga 7 & 8) has helped to partially mitigate the impact of DCR and utilisation rate drop.

• On a full year basis, the group registered RM58.7m loss in FY15 compared to RM251.3m profit last year, mainly due to significant drop in rig DCR (circa15-20%) and larger number of idle rigs for the year (Naga 2, 3, 5). Additional contribution from Naga 7 & 8 in 4Q15 was insufficient to make up for the loss of income amid difficult times in the jack-up rig industry.

• The group’s earnings outlook in 2016 remai ns bleak with Naga 6 cont ract expected to expi re in 2Q16, potentially putting further strain on group’s earnings. Prospects of securing new rig cont ract remains uncertain with Pet ronas looking to reduce its CAPEX further as announced earlier in the year

• At current rate of circa US$100k/day, EBITDA remains positive but in order to be P&L positive, we estimate rig utilisation rate needs to be as high as 90-95%, difficult to achieve in the challenging O&G environment.

• In the current oversupplied rig market, we opine that charter rates and utilisation rates could remain low in the near term until sustainable oil price recovery is seen.

Forecasts

• We adjust our FY16 earnings to loss of RM128.8m after adjusting for lower average rig utilisation (80% from 85% previously). FY17 core loss of RM80m is imputed based on: (i) average rig utilisation of 88% and ii) average DCR assumption of USD108,429/day.

Risks

• Global recession hitting O&G price; High asset cash cost; Petronas’ further CAPEX and OPEX cut.

Rating

SELL

Positives

• : Market leader in domestic drilling sector.

Negatives

• : Oversupply in jack up rig market.

Valuation

• We maintain our SELL call with unchanged TP of RM0.69 pegged to 0.5x FY16 BVPS.

Source: Hong Leong Investment Bank Research - 24 Feb 2016