Scomi Energy still a 'buy'

SCOMI ENERGY SERVICES BHD

By Hong Leong Investment Bank Research

Buy (maintained)

Target price: RM1.02

SCOMI Energy Services Bhd has been awarded two contracts in Myanmar worth a combined RM90mil by Petronas.

The contracts are from Petronas Carigali Myanmar Inc (PCMI) and Petronas Carigali Hong Kong Ltd (PCML) for the provision of drilling fluids, solid control, well bore clean-out, drilling waste management equipment, materials and services.

The contracts are for a period of three years.

PCML's work commenced in Dec 13 last year while PCMI's job is expected to begin on July 14.

Hong Leong Investment Bank Research (HLIB) is positive on the award as the company continues to secure contracts despite its already huge order book, which surges to RM5,1bil with the contract win.

The company is also involved in the bidding for the third round of risk service contract (RSC).

HLIB gathers from management that the prospects look promising. It conservatively does not include the potential award in its forecasts but a potential marginal field win will raise Scomi Energy's earnings by 23% based on its estimate.

Drilling waste management (DWM) will be the main booster for long term growth as legislation is trending towards zero discharge as adopted in the Caspian and North Sea.

HLIB understands that the company is in the vanguard of the development of microwave technology for the treatment of oil contaminated drill cuttings.

The commercialisation of this product in 2014 might be the game changer and new growth driver for the company.

Scomi Energy is trading at 13x calendar year 2015 (CY15) price earnings (PE) versus UMW Oil and Gas at 20x CY15 PE.

HLIB expects high UMW oil and gas (OG) valuation driving up the PE multiple of drilling related stocks such as Scomi Energy.

Forecasts are unchanged as the contract win is already factored in HLIB's earnings forecast.

There is the potential to secure RM400mil worth of contracts on top of its already huge order book of RM5.1bil.

Contract win in DWM business is given the potential addressable market size of US$2.1bil (RM6.88bil).

Risks include global recession hitting OG prices, technology advancement, relaxing of drilling waste management regulations.

HLIB maintains its "buy" call with a target price raised from of RM0.90 to RM1.02 after it rolled forward valuation to CY15 (based on unchanged 16x CY15 earnings per share of 6.4sen/share).

OIL AND GAS SECTOR

By Maybank IB Research

THE Petronas factor will continue to shape the outlook this year.

Momentum will be intense as a majority of projects under development moves into the production phase.

The secular growth thematic plays – risk service contract (RSC), drilling, offshore support vessels (OSVs), fabrication, and the refinery and petrochemical integrated development project (Rapid) – are set to drive prospects for the respective service providers along the various value chains.

Maybank IB says Bumi Armada and SakuraKencana Petroleum Bhd (SAKP) are its preferred picks with Barakah and Perisai its small-cap choice.

It is upgrading Dialog and Perisai to "buys" (from "hold" and "sell" previously) with higher target prices of RM3.90 and RM1.95, respectively, from RM3.05 and RM1.25.

The new target prices incorporate higher earnings contribution from its Pengerang tank terminal operations for Dialog and having rolled over its valuation for Perisai.

Dialog is now a "buy" as it is a major beneficiary of the Rapid project, where the final investment decision is due in April this year.

Bumi Armada remains a "buy" but is ascribed a higher target price of RM5 (+14%) after Maybank IB Research upgraded its earnings forecasts by between 7% and 14%, accounting for new contribution from Bumi Armada's recent Kraken floating production, storage and offloading vessel (FPSO) project win.

Maybank IB Research is placing its "hold" call on Petronas Gas under review pending the upcoming gas processing and transmission agreement renewal, which will be announced soon.

Bumi Armada and SAKP are Maybank IB Research's preferred picks in the sector for their growth prospects, balance sheet strength and stronger job wins outlook.

Bumi Armada, with its financial strength and execution profile, will continue to benefit from global FPSO orders while SAKP will grow with extended earnings visibility post the Newfield Malaysia merger and acquisition.

Barakah is the analyst's small-cap pick, a top prospect for transport and installation works.

Perisai is an alternate proxy play to drilling activities.

Volatility in oil price, cost overruns, slowdown in sector capital expenditure, forex movements and severe margin pressure are some factors that could blight the 2014 outlook.

MYEG SERVICES BHD

By CIMB Research

Hold

Target price: RM3.05

INVESTOR interest at CIMB Corporate Day was mainly focused on the proposed custom service tax monitoring system (CSTM) and the goods and services tax (GST)-related project for its next phase.

Demand for the online voluntary vehicle transfer service (VVTS) should be strong from this year onwards due to recent measures by Road Transport Department (JPJ).

CIMB Research maintains its earnings per share (EPS) forecasts but it raises its target price basis to 21x calendar year 2015 (CY15) price earnings (PE), in line with its peer Cuscapi (previously 19.1x CY15 PE, the sector target PE), as both of their three-year EPS compound annual growth returns (CAGRs) are strong at around 35%.

However, the stock remains a "hold" as its valuation is not cheap.

CIMB Research's top small-cap pick is Prestariang.

MyEG participated in our Malaysia Corporate Day conference, meeting up with around 40 fund managers in a few small group meetings.

Most of the questions were focused on the proposed CSTM services.

There was a positive and a negative surprise.

The positive was that JPJ announced in January that it was compulsory to use the biometric verification service.

This should accelerate demand for MyEG's voluntary vehicle transfer service (VVTS).

The negative was that the launch of the CSTM service will be delayed from end-2013 to April 2014 to ensure that the point-of-sales (POS) equipment is GST compatible.

The three-month delay for the CSTM launch is not material for the company.

More importantly, management's focus should be on the successful implementation of the CSTM over the next few months.

CIMB Research expects the CSTM service to face some teething problems initially and as such, an earnings contribution for MyEG in the sixth month of financial year 2014 (FY6/14) is unlikely.

The analyst is relieved that the demand for VVTS should finally take off as demand was soft over the past few quarters.

The future outlook for the stock would largely depend on whether the CSTM service successfully takes off in the coming quarters.

CIMB Research believes that the market has already factored in the growth potential of the VVTS and the foreign workers annual permit renewal (FWPR) services.

As such, the stock's valuation is not cheap at 19.5x CY15 PE.

IOI Corp Bhd

By PublicInvest Research

Neutral

Target price: RM4.82

PUBLICINVEST Research attended IOI Corp and IOI Properties' briefing hosted by Tan Sri Lee Shin Cheng, Datuk Lee Yeow Chor and Lee Yeow Seng.

Management guided on the prospects of the respective companies, which led PublicInvest Research to continue to recommend IOI Corp with a "neutral" call as valuations seem unattractive at current levels relative to the analyst's standard operating procedure (SOP)-derived target price (TP) of RM4.82.

To date, the group has a total land bank area of 230,000ha in Malaysia and Indonesia. Planted area stands at 163,000ha in Malaysia and 13,000ha in Indonesia.

Unplanted landbank is about 30,000ha, which will take three to four years to complete new planting.

Yeow Chor has been appointed as chief executive officer of IOI Corp replacing Shin Cheng, who remains the executive chairman of the group.

Management also mentioned that IOI Corp will become a purely integrated plantation company upon the demerger of the property arm.

Management has said that it would maintain its previous dividend per share.

This indicates that the group would revise its dividend payout higher as earnings would be reduced due to the removal of property contribution, which accounted for between 30% and 35% of the group's earnings previously.

For financial year 2014, the group has earmarked RM410mil for total capital expenditure spending.

Plantation and resource based manufacturing will be allocated RM236mil and RM174mil respectively.

Banking on its annual operating cash flow of RM1.1bil-RM1.4bil and current net gearing of 0.5x, PublicInvest thinks that there would not be any funding issues.

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