Results

Slightly below expectations: YoY 9MFY13 PATAMI swung from losses to a profit of RM31m, making up 58% and 60% of HLIB and consensus forecasts full year estimates.

Deviations

Mainly due to delay in recognition of earnings from LCS contract.

Highlights

9MFY13 Revenue increased by 36% to RM207m due to increasing maintenance, repair and overhaul (MRO) jobs and improved utilization of tankers coupled with better charter rate in the chartering segment. 9MFY13 PAT swung from losses to a profit of RM31m as it is no longer impacted by the cost overruns from the old commercial shipbuilding projects, higher MRO jobs and better performance by associate and joint venture companies. QoQ PATMI margin improved from 16.5% to 20% largely driven by higher income from MRO services.

We are becoming more confident on the company execution ability as this is the third consecutive quarter the company managed to register profit after six consecutive losses previously. This shows that the company is on the right path to recovery. In the commercial shipbuilding division, the company has completed the project that accounted for loses in FY12 and no longer impacted by the cost overrun.

Currently, the basic design of the LCS programmes is already finished with detail design likely to be completed by end of 2014 and physical construction by 1Q15. First combat ship is expected to delivery in 2018. We gather that formal agreement for LCS contract is expected to sign by end of 2013. Once the agreement signed, the company can start to recognise some works involved in the mobilisation of LCS contract. Stronger quarterly result from 1QFY14 onwards will be the main re-rating catalyst for the stock.

Risks

• Sacrificed profits while in technology transfer phase.
• Delays in contract disbursement.

Forecasts

FY13 earnings reduced by 12% given the delay in recognition of earnings from LCS contract. However, we raised our FY14 and FY15 earnings by 44% to RM79m and RM82m respectively given improving margin assumptions and commencement of recognising works involved in the mobilisation of LCS contracts (expected by early 2014).

Rating

BUY

Positives –

• Sole Royal Navy yard with strong order book.
• Located in a key naval strategic location and O&G yard.

Negatives –

• Earnings drag due to defence technology assimilation.
• Uncertainty from operating chemical tankers.

Valuation 

We upgraded our call from HOLD to BUY with TP raised from RM2.64 to RM3.20 based on lower P/E of 10x (vs. 12x previously due to i) less exposure to the oil and gas sector and ii) inline with the 10 years duration for the LCS contract) based on FY14 EPS of 32 sen/share.

Source: Hong Leong Investment Bank Research - 15 Nov 2013