Results

3QFY14 results came in with revenue of RM241m (+2% YoY, +8% QoQ) and core PATMI of RM3.8m (+181% YoY, +386% QoQ). Although core PATMI growth appears strong both YoY and QoQ, we caution that this is merely the result of a low base effect and not an indication of sustained improved performance.

For the cumulative 9M horizon, core PATMI amounted to RM15.6m (after stripping out RM5.6m fair value gains on its stake in SGX listed Technics), representing a 62% YoY decrease.

Deviation

• 9M PATMI was disappointing, making up 37% of our full year estimates (35% of consensus). The significant deviation was because we projected a margin recovery in 2H as we expected most of its “troubled jobs” to be completed by then.

Dividends

• None declared for 3Q. (Cumulative: 1 sen).

Highlights

Problems with VOs persist. Eversendai has been suffering from variation orders (VOs) since 2QFY13 for its jobs in Qatar and India (in the red). Due to additional work scope, Eversendai has been recognising additional cost but without offsetting revenue as the accounts have not been finalised.

High start-up cost for O&G. It’s newly set up O&G division also suffered from high start-up cost which was not offset by revenue flowing through as its contracts (mainly 2 liftboats worth RM580m) are still at the early stage of execution. We expect revenue contribution to begin from 4Q onwards.

Orderbook replenishment strong. The momentum of job wins for Eversendai has picked up with over RM1.2bn worth of contracts secured YTD (FY13: RM669m). Its orderbook currently stands at RM1.6bn, implying a revenue cover of 1.7x which is decent considering Eversendai’s nature as a subcontractor for structural steel works.

Risks

• Unable to claim VOs and prolonged high start -up cost.

Forecasts

• Despite our earnings cut earlier in Oct, results continue to disappoint. We further reduce FY14-16 earnings by 48%, 22% and 7% respectively as we impute (i) continued VOs into FY15 and (ii) prolongation of high start -up cost.

Rating

HOLD, TP: RM2.07

• Eversendai’s earnings have been a drag for 6 consecutive quarters, stemming from VOs and high start -up costs. However, we regard these factors as short term hiccups rather than a structural issue. We retain our HOLD rating as share price has declined 32% YTD, which we feel prices in these negatives.

Valuation

• SOP based TP reduced from RM0.91 to RM0.72 following our earnings cut and marking to market its stake in Technics.

Source: Hong Leong Investment Bank Research - 1 Dec 2014