Results

Below expectations - Reported PATAMI of RM3.3m for 2Q14 took 1H14 to RM28.4m or make up only 27.0% and 32.7% of HLIB’s and consensus’ estimates respectively.

Deviations

Due to; 1) lower revenue; 2) tail-end of projects (tapering-off of E&P revenue); 3) additional work costs (variation orders); 4) acceleration of works for projects (incurred cost up-front); and 5) higher cost of materials.

Dividends

None.

Highlights

Quarter review… 2Q14 revenue fell by 35.4% YoY and 23.9% QoQ mainly due to dwindling order books, as newly tendered projects (local power and infrastructure) were delayed. As of 2QFY14, the outstanding order books stand at RM1.1bn (including newly announced RM375.4m for its 40% owned Amihan Energy-Wind Power in Philippines) translating to 0.7x FY13’s and 1.0x FY14e’s revenue. Combined with variation orders (cost recognised up-front) and accelerated works (incurred up-front cost), and higher net interest expenses, PATAMI shrank significantly to RM3.3m (-92.7% YoY; -86.6% QoQ).

1H14 review… Similarly, 1H14 revenue dropped by 20.3% to RM645.4m and PATAMI dropped by 67.8% to RM28.4.

Prospects… 2H14 performance likely to remain lacklustre due to dwindling order books, continued variation orders and accelerated works. Any significant rebound will only be visible in 2Q15 (barring further delay in project tenders).

Tender Books… Management guided current tender books at RM10bn as compared to RM5bn in early 2014, mainly due to delays in several large projects.

Transformation… Management continued to restructure its revenue stream, by increasing stable and recurring income source through power plant concessions such as India Coal IPP. Management is on negotiating for a few new regional IPP ventures.

Risks

Delay in completing the India IPP project; Regulatory and political risk (both local and abroad); Rising raw material prices; Unexpected downturn in the construction sector; and Sharp depreciation in the Indian Rupee.

Forecasts

Cut earnings for FY14 by 53.9% to RM48.6m and FY15 by 29.0% to RM109.9m, on delayed timing of new contracts, variation orders and accelerated works (we have yet to impute potential earnings upside from the claims on variation orders).

Rating

HOLD

We cut our recommendation to HOLD as we expect continued earnings disappointments for the remaining year.

Valuation

Cut TP to RM2.48 (from RM3.53) based on SOP valuation (see Figure #4), after we have updated our model.

Source: Hong Leong Investment Bank Research - 27 Aug 2014