Highlights

Below are the key takeaways from Eversendai’s 1QFY14 results briefing, chaired by Group MD, Tan Sri AK Nathan:

O&G prospects… Expect to complete its first ever offshore fabrication yard in UAE (capex RM60m) by Jan 2015, which has 200,000 sqm area and 550m water front. The yard will be the main facility for Eversendai to expand into O&G industry (EPC and refurbishments for multipurpose offshore vessels, jack-up rigs, MOPUs, FPSOs, barges, etc). The division is essential for Eversendai to achieve its targeted annual RM2bn turnover by 2017.

RM580m O&G contract… Announced first ever EPC contract for 2 liftboats (RRPT). The EPC will take 18-22 months to complete, with ~20% net margins (vs. other divisions’ margins of 10-15%). The contract will serve as a strong starting point for Eversendai to secure more projects in the future (from 3rd parties). It is currently tendering O&G contracts worth US$850m (RM2.7bn) in Middle East.

More contracts expected … YTD, Eversendai has secured RM752m worth of jobs (including RM580m RRPT) which is 50% of its target and 75% of our replenishment assumption. More jobs are expected to be announced soon (another RM250m on the way), given the stabilization of Middle East situation, post-election in India and acceleration of government (ETP and Pengerang) and private projects (several high rise towers) in Malaysia.

Margin improvement… Expect margin normalization (to ~ 10%) by 2H14, from contribution of new jobs (including O&G) and completion of 2 major jobs, which incurs cost overruns in 1H14. The new mix of O&G contributions by 2015 is expected to further improve net margins.

Order books… Based on RM1.1bn outstanding order book in 1QFY14 (RM1.7bn YTD), the run-rate is RM712.1m for FY14, RM311.4m in FY15 and RM39.6m in FY16. The group is tendering for projects worth RM10-12bn.

Variation orders… Variation orders worth RM36m is being processed, and management is confident of claiming the total amount and recognising it in 2HFY14.

Risks

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

Forecasts

Unchanged.

Rating

HOLD

Too much expectation for earnings growth and contract flows have been priced in Eversendai’s share price and it will take earnings recovery in the subsequent quarters to regain back investors’ confidence. Hence, we are maintaining our HOLD call on the company until signs of improvement.

Valuation

Maintain TP at RM1.01 based on unchanged 10x FY15 earnings.

Source: Hong Leong Investment Bank Research - 29 May 2014