News

1HFY13 core earnings (adjusted for forex fluctuations) fell by 36% to RM37.6m (4.85 sen/share), missing estimates by making up 28% and 30% of ours and consensus estimates respectively.

Deviations

Due to slower construction billings in the Middle East division.

Dividends

None as opposed to 2 sen/share declared in 2QFY12. We believe dividend will be declared in 4Q.

Highlights

YoY… 2Q revenue slipped by 4% to RM247.5m on the back of weakness in the Middle East and India divisions. GP margin contracted slightly by 1% to 16%. With the absence of provision reversal which occurred in 2QFY12, YoY core earnings fell by 46% to RM16.5m (2.13 sen/share).

QoQ… Revenue rebounded slightly by 2% QoQ, mainly due to Malaysian contribution. Revenue from the Middle East has been weak for the past 2 quarters. Although GP grew by 4%, overall core earnings fell 22% due to higher expenses. Of note, associate level incurred losses due to start-up expenses for Vahana.

1HFY13… Revenue fell by 3%, due to complex fabrication projects in the Middle East, which has led to delays in reflecting potentially higher revenue. With variation orders still pending for approval coupled with margin contraction, core earnings fell by 36%.

Earnings visibility… Overall, Eversendai has an outstanding orderbook of ~RM1.4bn, translating to 1.37x FY12’s revenue and 1.26x order book-to-market cap ratio.

Risks

Execution risk; Regulatory and political risk; Rising raw material prices; Unexpected downturn in the construction cycle; and Sharp fluctuation in forex.

Forecasts

FY13 and FY14 earnings slashed by 11% and 1% respectively to reflect the slower construction billings.

Rating

BUY

Earnings have been disappointing over the past few quarters, as the company is still in the midst of obtaining approvals for its VOs. The lumpy earnings arising from the VOs will eventually flow through Eversendai’s books and is a matter to timing. Despite slow contract wins, the latest smallish contract secured from Petronas is a good start to venture into the O&G fabrication sector. We are beginning to see its business development activities bearing fruit.

We continue to favour Eversendai for its niche in complex structural steel works and prudent management. Hence, we are maintaining our BUY call on the company.

Valuation

Due to lower forecasted earnings, our TP has been reduced by 5.7% to RM1.65 from RM1.75 based on unchanged 10x average FY13-14 earnings.

Source: Hong Leong Investment Bank Research - 28 Aug 2013