Results

Below expectations: 2Q PATAMI swung to RM9m profit from a loss of RM1.6m in 1Q13. However, 1H13 PATAMI only making up of 7.4% and 8.8% of HLIB and consensus full year estimates, respectively.

Deviations

Lower margins on engineering, pipe-coating jobs and operational costs on the plantation segments, as well as delays in contract disbursement in the O&G division.

Dividends

None.

Highlights

2QFY13 revenue fell 15.7% yoy due to pipe coating business which was affected by delays in the award of projects and slowdown in the pipe manufacturing business. Some of the oil and gas jobs are only anticipated to commence in the 2H13.

YoY operating margin decreased from 7.7% to 3.9% due to lower margin from pipe coating, manufacturing business and additional operation cost in plantation segment. QoQ operating margin rebounded from 0.8% to 3.9% as O&G division turnaround with better margin job executed.

Renewable division is the bright spot as 1H13 PBT increased by 64% YoY due to increase in the number of projects being executed arising from a robust regional oleochemical and the local O&G markets.

The company orderbook currently stands at RM1.5bn with 68% from oil and gas division, 20% from renewable energy and 12% from industrial trading & services. Although we expect the Renewables division to continue to contribute strongly, a stronger catalyst will come from winning higher margin pipe coating jobs in Turkmenistan, the North Malay Basin and the Gulf of Mexico (GoM). The two Gulf of Mexico (GoM) plants are completed and operational. This region may turn out to be the land of milk and honey due to the deepwater, high temperature nature of oil fields which require specialised higher margins solutions.

Risks

• Political risk, Congo Oil Palm Plantation.
• Execution risk.

Forecasts

PATAMI trimmed by 37.5%, 22% and 19% in FY13, FY14 and FY15 respectively to conservatively reflect lower margin from pipe coating and manufacturing business.

Rating

HOLD

Positives –

• Infrastructure growth related to new fields.
• Strong balance sheet and acquisition record.

Negatives –

• Acquisition fuelled growth - volatile in downturns.
• Capex burden developing Congo oil palm.

Valuation

Maintain HOLD call with a lower TP of RM1.66 (as a consequent of our lowered earnings forecasts) based on unchanged 13x FY14 EPS of 12.8 sen/share.

Source: Hong Leong Investment Bank Research - 23 Aug 2013