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Author: PublicInvest   |   Latest post: Tue, 18 Jun 2019, 10:48 AM

 

E.A. Technique (M) Berhad - Solidifying Its Comeback

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While just having reported a good set of financial results in February this year which showed a turnaround in earnings back to profitability, E.A. Technique (EAT) has once again recorded another encouraging development, reaffirming that the Group is on the right track for a stronger growth trajectory. EAT announced that it has successfully been awarded a contract by PETCO Trading Labuan Company Limited for the Provision of Long-term Time Charter Coastal Vessel Services of 3 units of 9,000 DWT size vessel for a 10- year period worth RM478.2m. We are optimistic over this development as it improves EAT’s orderbook going forward, ensuring that the earnings visibility remains intact. It also proves management credibility in maintaining its strong presence in the smaller-sized market space. Inclusive this contract, we estimate the orderbook currently stands at about RM1.3bn from RM883.6m previously, translating to 4.7x of FY18’s marine operations revenue. We make no changes to our earnings forecast for now, pending its 1QFY19 results due this month. Our Outperform rating on EAT is affirmed with an unchanged TP of RM0.73, based on 10x PER over its FY19 EPS. EAT is trading at only 6x forward PER currently, indicating that forward valuations remain attractive.

  • The long-awaited contract was awarded by PETCO Trading Labuan Company Limited, a subsidiary of PETRONAS, via a Letter of Award dated 8 May 2019. The contract is for the provision of Long-term Time Charter Coastal Vessel Services, utilizing 3 units of 9,000 DWT-sized vessels for a total value of RM478.2m. The contract lifespan is for a primary period of 5 years with 5-year extension options of 1 year each. Vessel construction will take about 20 months hence the contract is only expected commence in Dec 2020 for Vessel 1 and 2, and Jan 2021 for Vessel 3.
  • Orderbook surges by 50.6%. EAT secured multiple contracts in FY18 with a combined value of RM120m and concluded the year with a healthy total outstanding orderbook in hand of RM883.6m including the extension options. This contract alone represents about 4x of FY18 replenishment, EAT’s outstanding orderbook in hand has now jumped by >50% to RM1.4bn. Assuming a burn rate of RM70m in 1QFY19, we estimate the orderbook currently stands at about RM1.3bn, translating to 4.7x of FY18’s marine operations revenue.
  • Our views. We are not entirely surprised by this contract win since as we had already anticipated some works to be secured this year. Nevertheless, we are pleasantly surprised with the value of the contract as it has also exceeded management’s target of a 30% success rate from RM1.2bn tenderbook which would have translated to c. RM360m. The RM478.2m exceeds that by 33%.
  • Expecting more? The Group’s fundamental outlook remains strong on the back of improved sentiment and activities in the oil and gas industry given prices being currently stable at above USD60/bbl. This is already evident in its growing tender book which is up by >35% to RM1.2bn as of February this year. Stripping-off this new contract worth RM478.2m, we anticipate the balance tenderbook to currently stand at approx. RM700m, assuming no new bid book. Given the improved sentiment coupled with good track record and strong business relationship with clients, we do not rule out the possibility of the Group securing more projects in the short-term time charter and/or port operation segments as they do not require capex given EAT’s capacity constraint.
  • Earnings outlook remains intact. We make no changes to our earnings forecast for now, pending its 1QFY19 results due this month. Nevertheless, we foresee this contract lifting our FY21 higher by c. 20.8% to RM50m. For its upcoming 1QFY19 results, we expect the Group will register c. RM9m core profit from its brought-forward orderbook. Although we expect the Group will register even better numbers in FY19 given the lesser dry-docking activities, we rather err on the side of conservatism in our projections with average earnings growth of c. 6.5%. at this juncture. Recall, there were 4 dry-docks that had been undertaken in FY18 including 2 that were brought forward from FY17 due to shortage of capacity. As such, the number of dry-docking activities will normalize in FY19 onwards.
  • Possible fund raising for future earnings growth. Though the funding structure was not disclosed in the announcement, we are of the view that there will be a fund-raising exercise most likely via private placement to fund the capex of the vessels. To recap, EAT’s net gearing as of FY18 stood at 1.7x including RM60.8m of shareholders loan. Excluding this, EAT’s adjusted net gearing will be at 1.4x which should not be a worry as they are mostly supported by long-term contracts. It does however limit EAT’s working capital for future sizable contract. From our channel checks, the 9,000 DWT-sized vessels usually will cost around USD13m USD18m per unit. For illustration purposes, assuming the cost to build one vessel is about USD15m, EAT will need a total of about RM180m to finance all 3 vessels.
  • Overall, we continue to like EAT and remain optimistic over its future direction given its slow but steady growth on the back of its i) involvement in a relatively defensive industry regardless of oil price movements, ii) stable business with more than 70% of its contracts on long-term charters, iii) resilient earnings visibility up to FY20 and to register double digit growth beyond FY21 from its balance orderbook of c. RM1.3bn, and iv) strong potential in securing new contracts from its tender book.

Source: PublicInvest Research - 17 May 2019

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