PVD – Earnings recovery expected in FY21F – Update

• 9M20 net profit increased 155.7% yoy, supported by strong income from affiliates (+183.6% yoy) and provision reversal.
• Reiterate Hold and unchanged TP of VND11,700.

3Q20 net profit growth driven by well service activities

In 3Q20, the company posted a 18.9% yoy increase in net revenue to US$54.8m, mainly on a 46.3% yoy higher revenue from the drilling segment, with the contribution of an average 1.7 leased rigs and 4.2% yoy improvement in average day rate. However, blended gross margin contracted by 3.3% pts yoy as the 9.0% pts reduction in drilling margin outweighed the 12.7% pts expansion in well services gross margin. At the bottom line, net profit still posted a 43.4% yoy growth to US$1.7m, fueled by the US$2.0m income from affiliates (mainly from Baker Hughes JV), vs. US$0.2m loss from affiliates in 3Q19. The company credited the strong improvement in the well services segment to lower competition in the domestic market, as it was hard for foreign contractors to enter Vietnam this year due to the Covid-19-related travel restrictions.

9M20 results ahead of expectations

9M20 net profit was up 155.7% yoy thanks to (1) the strong performance of the well services segment (9M gross profit +28.5% yoy, income from affiliates +183.6% yoy), and (2) the ramp-up in debt collection which allowed a net provision reversal of US$3.2m, vs. provision expenses of US$1.7m in 9M19. 9M20 net profit was better-than-expected at 102.5% of our full-year forecast, as the marked improvements in the well services segment for both PVD’s subsidiaries and affiliates were positive surprises. For the FY20 forecast, we lower gross margin by 1.3% pts to reflect weaker-than-expected drilling segment, but increase income from affiliates assumption to reflect the 9M20 results.

Drilling activities expected to warm up in FY21F

We maintain our FY21F revenue forecast with average utilisation rate recovering to 80% from 73% in FY20F, while average day rate stays around US$60,000. According to PVD, the customer Repsol Malaysia (which terminated the contract with PVD III rig earlier) has started to open bids for the continuation of the same contract from FY21F, which is ahead of the company’s expectation. Therefore, PVD plans for the PVD III rig to return to Malaysia, while the PVD II and PVD VI rigs could stay in Vietnam in FY21F to contract for potential domestic projects from customers such as

Vietsovpetro and ENI.

Reiterate Hold and TP of VND11,700
Our TP stays unchanged at VND11,700 based on a 50:50 combination of DCF and target FY20-22F P/BV of 0.4x. Upside risks are faster-than-expected recovery in drilling sector and quick debt collection. Downside risks include higher opex and low oil prices.

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