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Author: PublicInvest   |   Latest post: Tue, 16 Jul 2019, 8:56 AM

 

E.A. Technique (M) Berhad - Too Cheap To Ignore

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E.A. Technique (EAT) announced that it has successfully secured another contract by PETRONAS Carigali Sdn Bhd for the provision of temporary storage tanker (TST) for a primary period of 12 months worth RM84.2m. Commencement of the project is expected to be as early as November. That said, we make no changes to our FY19 earnings forecast but adjust FY20/21 numbers upwards by an average +16.3% to reflect contribution for the new projects. Our Outperform rating on EAT is affirmed with a new TP of RM0.90, based on 10x PER over its FY20 EPS. EAT is currently trading at only 4.5x forward PER, the steep discount (>50%) deeming forward valuations highly inexpensive.

  • The new contract was awarded by PETRONAS Carigali Sdn Bhd, via a Letter of Award dated 31st May 2019. The contract is for the provision of temporary storage tanker (TST) including station keeping and flexible riser tie-in for Sepat Derisk and early production system (DEPS). This contract worth RM84.2m is for a primary period of 12 months with extension options of six months from expiry date and a further six months on PETRONAS’ discretion at an agreed fixed schedule of rates. Should PETRONAS exercise the extension options of another 12 months, we project the total value of this contract would be around c. RM120m, assuming a 50% cut from the first 12 months daily charter rate (DCR). This contract will commence works in November 2019.
  • Solid outstanding orderbook of RM1.3bn. Inclusive of this contract, EAT has secured a total of RM562.4m YTD, representing a 4.7x jump versus FY18 replenishment of RM120m. Together with the earlier contract secured valued at RM478.2m, we estimate EAT’s outstanding orderbook in hand remains solid at RM1.3bn, translating to 4.3x of FY18’s marine services revenue. These will keep the Group busy over the next 3 years.
  • Our views. While not entirely surprised with this contract win, we applaud this development as it will further improve EAT’s orderbook going forward, ensuring that the earnings visibility remains intact. It also solidifies management credibility in securing contracts while maintaining its strong presence in its niche market. The YTD wins of RM562.4m has largely exceeded management target by 56.2% from RM360m worth of projects or 30% success rate out of RM1.2bn tender book.
  • Double digits earnings growth. While the recent contract win will only start contributing in FY21 onwards, this current project will contribute as early as this year since the commencement of work will be in November. Nevertheless, we maintain our conservative stance in our projections with expectation that the progress payment will only start next year. In line with the company’s policy of not buying a new vessel for contract <5- year period, EAT will need to get third-party vessels to work on this project. As such, this project does not require heavy capex, though margins will be slightly lower than if it were normal-owned vessels. Based on progress billing and profit margin assumptions, we revise our FY20/21 forecast higher by 16.4% and 16.2% respectively to RM45.5m and RM48.1m to account for these two contract contributions. These translate to an EPS of 9.0sen and 9.6sen respectively, with next year’s earnings growth of 24%.
  • Possible fund raising for future earnings growth. With the strong contract wins YTD, we are of the view that there will likely be fund-raising exercises to fund the capex, particularly for the previous contract win (RM478.2m) which will require EAT to build three new tankers with 9,000 DWT sizes. EAT’s net gearing as of 1QFY19 stood at 1.5x (FY18: 1.7x) including shareholders loan. Excluding this, EAT’s adjusted net gearing will be at 1.2x (FY18: 1.4x), relatively stable and mostly supported by its >75% long-term contracts. It however limits EAT’s working capital. As such, we are positive over on any potential fund raising (possibly via share placements) as this will augment its capacity to continue growing.
  • 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 75% of its contracts on long-term charters, iii) resilient earnings visibility with double digit earnings growth from FY20 onwards from its balance orderbook of c. RM1.3bn, and iv) consistently replenishing its order book every year.
  • Update on material litigation with MMHE. Sentiment on the stock has been dampened by the material litigation issue with MMHE. In response to the Adjudication Decision dated 27 May 2019 pursuant to the CIPAA between MMHE and the Group (of which EAT had been liable to pay USD21.6m), EAT had on 4 June 2019, filed an application to set aside the Adjudication Decision pursuant to the CIPAA encompassing the following i) originating summons in respect of EAT’s application to set aside the Adjudication Decision, ii) affidavit in support of EAT’s application to set aside the Adjudication Decision, and iii) certificate of urgency requesting for the hearing of EAT’s application to be heard before 28 June 2019 which is the due date for payment of the Adjudication Sum. However, this has been adjourned to 6 August 2019. EAT believes they have fair chances of setting this aside, in favor of arbitration proceedings. On top of this, MMHE had recently filed another claim for a total amount of USD6.1m in relation to disputes over the alleged non-payment of additional works done by MMHE and the invoices purportedly issued by MMHE under the Conversion Contract. This however, will take about another six months for Adjudication Decision. Management, similarly, will fight this action, in belief of having fair chances in setting aside the claim.

Source: PublicInvest Research - 25 Jun 2019

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