Sep 24, 2017 09:08:15

We have visited PT Elnusa ($ELSA) yesterday to get some colors of its 2H17-FY18F outlook after a dismal 1H17. It has secured a meaningful land seismic contract and deployed its drilling rig since JunJuly and expect these new developments to lift FY17F earnings into the region of IDR150-200bn (1H17: IDR14bn), translating into FY17F PER of 11- 8.5x at current price.

We believe it is about time for a bottom fishing given a better 2H17 outlook. Further, being a subsidiary of PERTAMINA, the recovery of job flows from Mahakam block after the Total – PERTAMINA transition and a significant boost of ELSA’s given contracts/ earnings thereafter will likely lift share prices, although the exact timing is hard to gauge.

  • 1H17 net margin declined on lower revenue from upstream and downstream O&G support segment. Elnusa’s 1H17 revenue grew 16% YoY but gross profit saw a YoY decline of 51%, driven by 10-15% drop of revenue from these segments, segmental gross margins were also lower due to the expiry of higher margins contracts at Mahakam block and the non-deployment of its drilling rig during 1H17. Elnusa managed to increase the given fuel distribution volume from PERTAMINA, with this segment’s revenue/gross profit grew 75/65% YoY but it was insufficient to make up for the other segments due to inherently lower margins (single digit) of this business segment.
  • Revenue and margins of upstream segment to improve in 2H17. Elnusa has secured a land seismic at West Papua (working from July 2017 to 1H18) and another Marine Seismic contract at Aceh (working from August-Nov 2017) with a indicative contract value of IDR3-4tril. Its drilling rig was also employed by PERTAMINA EP at East Kalimantan from Jun-Des 2017. Management guided gross margins of 15-20%, meanwhile, trying to further increase the fuel distribution quota of PERTAMINA.
  • Mahakam block handover is a big medium term catalysts. Contracts from Mahakam block used to contribute more than 50% of revenue in both upstream/downstream support services in FY14-16 and saw a significant decline due to the Mahakam block handover. Elsa targeted FY18F net profit of at least IDR200bn without improvement from Mahakam, however, expect net profit to swing back to IDR300bn when job flows of Mahakam kicks in next year, Elnusa expects higher job flows from PERTAMINA due its subsidiary status.
    The handover proves to be lengthy so far due to conflict of interests between TOTAL and PERTAMINA, that said, the block contributes to 20% of the nation’s total natural gas output and national’s interest is at stake.
  • Key risks are Mahakam handover delay in FY18F and margin squeeze. Elnusa’s share price has corrected 50% YTD and given a better outlook going forward, downside should be limited. That said, FY18F earnings growth will be limited if job flows from Mahakam Block does not recover. Elnusa acknowledge that contract margins from PERTAMINA were higher than foreign oil and gas players, whose are increasingly sensitive on production costs after the new gross split PSC regime. (Norman Choong, CFA)