Results

Above Expectation: QoQ, 2QFY14 profit doubled, bringing 1HFY14 profit to RM61m, making up of 64% and 60% of HLIB and consensus full year estimates, respectively.

Deviations

Due to higher than expected margin from O&G business.

Dividends

Declared interim dividend per share of 2.5 sen vs. our full year forecast of 4 sen.

Highlights

2QFY14 core earnings rebounded strongly qoq and yoy to RM40m mainly due to progress recognition of both major pipes coating project (RM627m contract from StateOil’s Polarled and RM232m contract for North Malay Basin). We understand major works for North Malay Basin project was completed in 2Q14 while Polared project was on 30% milestone and expects to be completed in May 15. YoY, EBIT margin improved from 4% to 13% due to prudent cost management and higher margin projects from O&G segment.

The company has secured around RM500m contract for O&G segment year to date. QoQ, total orderbook fell from RM1.7bn to RM1.5bn (70% from oil and gas division, 18% from renewable energy and 12% from industrial trading & services) after completion of North Malay Basin project. The company is tendering RM5bn worth of job with 70% related to O&G and expects to secure some contract to replenish orderbook for O&G division within next 2 quarters. Management expects the acquisition of 49% equity interest in the JV between Alam and CIMB Private Equity for RM106m to be completed by 4Q14.

We expect plantation division to remain in the red in near future. Plantation segment remain in the red due to initial start-up cost. The company plans to plant another 7,500 hectare in 2014-2016.

Risks

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

Forecasts

FY14 and FY15 earnings raised by 14% and 3% respectively due to higher margin assumption on O&G 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 and TP raise from RM1.96 to RM2.00 based on unchanged P/E of 13x on FY15 EPS of 15.4 sen/share.

Source: Hong Leong Investment Bank Research - 26 Aug 2014