Results

Below expectations: 9M Core Profit dropped 60% yoy to RM24m, only making up of 38% and 28% of HLIB and consensus full year estimates, respectively.

Deviations

Delay in recognition of some coating projects (RM627m contract from StateOil and RM232m contract for North Malay Basin).

Dividends

None.

Highlights

9MFY13 revenue fell 14% yoy due to lower contribution from pipe coating business which was affected by delays in the commencement of certain projects (RM627m contract from StateOil and RM232m contract for North Malay Basin are only expect to commence in 4QFY13) and result of trading business changing its product mix to focus on high margin, low volume product.

YoY, 3QFY13 operating margin improved from 2.7% to 4.2% due to higher margin from oil and gas project. Renewable division remained the bright spot as 9M13 PBT increased by 62% YoY due to increase in the number of projects being executed arising from a robust regional oleochemical and the local O&G markets.

Its associate, Petra Energy was in loss making due to lower contribution from topside maintenance, HUC jobs and onshore civil engineering services.

The company orderbook currently stands at RM1.7bn with 71% from oil and gas division, 18% from renewable energy and 11% from industrial trading & services. Although we expect the Renewables division to continue to contribute strongly, a stronger catalyst will come from commencement of the better margin job in Norway and North Malay Basin. 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

FY13 Core Profit trimmed by 31% to reflect delay in recognition of Norway and North Malay Basin jobs and lower contribution from its associate Petra Energy. We maintain our FY14 and FY15 earnings forecast as we expect both Norway and North Malay Basin to commence in 4Q13 and contribute strongly onwards.

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 an unchanged TP of RM1.66 based on unchanged 13x FY14 EPS of 12.7 sen/share.

Source:Hong Leong Investment Bank Research - 26 Nov 2013