COOEC:FY16in line;limited recovery and rich valuation warrant Hold rating
EPS drops 61.4% yoy; we see a limited recovery ahead。
COOEC posted FY16 NP of RMB1,315mn, down 61.4% yoy, but in line withDBe’s RMB1,338mn. The decline was driven by sluggish offshore EPC and asharp GPM decline by 14.9%pt to 15.8%. Without the government subsidy ofc.RMB900mn, the NP margin would have dropped further to 3.5% (vs thereported 11%). COOEC believes a low oil price environment and lack of capexspending by O&G companies in recent years were key to the sharp decline. Wesee limited recovery in 2017E with a weak backlog, and hence reiterate ourHold rating with a target price of RMB8.2/sh.
Segment performance varies; weak offshore EPC & strong non-oceanic EPCn
The offshore EPC segment recorded revenue of RMB6.2bn, down 52.6%yoy, and GPM contracted 24.1%pt to 8.5%, due to a drop in businessvolume. Volume dropped the most in the East China Sea and Bohai areas,where revenue plunged c.70-80%.n。
Non-oceanic EPC recorded revenue of RMB5.7bn, up 88.3%, and GPMwas stable at 23.3% (FY15: 22.7%). Yamal projects accounted for 54%.LNG storage tank projects in Guangxi and Tianjin also contributed.
GPM stays low with competitive pricing; 2017 oil & gas capex remains low
Management had guided that the 20-30% GPM in FY12-15 would beimpossible in the current low oil prices environment. Although the oil priceshas recovered from its trough, COOEC does not expect a material pick-up incapex in the oil & gas sector and project owners are more sensitive to contractpricing as well.
Long-term project pipeline supported by CNOOC and overseas projects
New orders in 2016 amounted to RMB7.8bn (domestic RMB4.8bn + overseasRMB3.0bn) while the backlog stood at RMB10.4bn, representing only 0.87xFY16 sales. CNOOC’s capex increase from c.RMB50bn in FY16 to c.RMB60-70bn in FY17E is positive for COOEC, as historically COOEC would securec.25% of E&P as part of capex. The overseas segment accounted for c.60% ofrevenue, up 23.3% yoy and >50% for the first time. COOEC is currentlytracking and bidding for over RMB40bn of projects overseas and expectsoverseas revenue to rise.
Valuation and risks
We maintain our Hold on COOEC with a target price of RMB8.2/sh. We derivedour TP by applying COOEC’s average 12-month forward EV/EBITDA of 8.0x. Webelieve the current share price, which implies 7.6x forward EV/EBITDA and 1.3xforward P/B (vs. 8%/10% FY17/18E ROE), has priced in most of the positives.Moreover, COOEC is trading in line with its global offshore engineering peers,and its backlog-to-revenue ratio is trending below the 1.0x level in 2017/18E.SEG (2386 HK, Buy) is our top oil & gas EPC play and capex proxy. Key risksinclude: 1) slower/faster than expected CNOOC's capex recovery; 2)slower/faster than expected overseas business expansion; 3) major accidents;and 4) exchange rate volatility.