• 2QFY19 slipped into the red with a net loss of RM34.4m mainly due to delays, cost overrun and trade receivables impairment; 1HFY19 net loss amounted to RM19.4m.

• We are also concerned over its deteriorating balance sheet as 44.5% of its existing receivables are owed by two major clients; further impairments is possible.

• We reduce our FY19F earnings forecast by 83.3% and lower FY19F-21F margin assumption by 0.3%-7.4% on persistent margin pressure ahead.

• Downgrade to SELL with a lower TP of 0.20 after we peg lower PE multiple of 10.5x with FY20 EPS. We are concern on its sizeable receivables in its balance sheet and margin pressure.

Losses on big ticket items

2QFY19 turned a net loss of RM34.4m arising from three key cost items amounting RM49m: i) RM18.5m losses arising from delays of infrastructure projects, ii) RM15.4m from cost overrun in a property project, and iii) RM15.1m of trade receivables impairment. As a result, 1HFY19 earnings slipped into the red with a net loss of RM19.4m.

Deteriorating balance sheet

We also throw caution on its deteriorating balance sheet. Receivables have ballooned to RM550m, 75% out of its total assets of RM748m. We believe there is possibility of another round of impairment on receivables as according to management, c.44.5% of the RM550m receivables is owed by two major clients.

Job wins surprise but margin could be pressured

Despite FY19 job wins already exceeding our orderbook replenishment target of RM400m, we are concern over margin pressures setting in amidst the backdrop of intense competition. We also do not rule out further delays and cost overrun on existing projects to weigh as well as revisions on major infrastructure projects affecting earnings.

Cut FY19F earnings forecast and margin assumption

We reduce our FY19F earnings forecast by -83.3% while also lowering FY19F-FY21F margin assumptions by 0.3-7.4ppts. Still, our FY20/21F earnings were raised by 11%/6%; this is mainly due to orderbook spill over amidst delays. We expect persistent margin pressure given the sluggish outlook of the domestic construction sector.

Downgrade to SELL with lower TP of RM0.20

Downgrade to SELL with lower RM0.20 TP (from RM0.50) after cutting PE multiple to 10.5x (from 10.7x) and pegging it to FY20 EPS (instead of FY19 EPS). The lower multiple ascribed mainly reflects concern over its deteriorating balance sheet and persistent margin pressure.

Source: BIMB Securities Research - 26 Feb 2019