Highlights

• 4Q results briefing. Eversendai yesterday hosted an investor’s briefing post 4QFY14 results. To recap, after 5 previous consecutive weak quarters, 4Q finally posted a strong rebound at RM18m in PATMI.

• Troubled jobs are over. The weak earnings in the past were caused by variation orders (VOs) for certain jobs in Qatar and India. We gather that these jobs have largely been completed. Margins in the Middle East continue to show healthy recovery signs while India finally turned positive after 5 consecutive quarters of being in the red. Management shared that this experience has caused them to now be more careful when drafting contract terms for highly complex projects.

• O&G starts contributing. Apart from VOs, the weak earnings previously were also caused by high start-up costs for its O&G division. With works now ongoing, these costs have been offset by revenue contribution. The O&G division contributed 26% to revenue in 4Q. Although PBT was thin at 1.8%, this was guided to expand in the coming quarters.

• Eyeing the skies. Eversendai is bullish on its job flow prospects and is looking to beat its previous orderbook replenishment high of RM1.7bn in FY10. With YTD job wins at RM618m, this implies that another RM1.1bn worth of contracts could materialise in the next 10 months. Last year’s job wins of RM1.1bn was the highest since FY10.

• What’s in the pipeline? Eversendai has tendered for RM11.8bn worth of jobs, largely comprising of its usual bread and butter structural steel works for buildings. Geographically, 30% of these tenders are in Malaysia. By division, O&G tenders make up 25% of total bids, which is evenly split between Malaysia and the Middle East.

Risks

• Low oil prices would (i) cut capex by oil majors and (ii) reduce spending by oil dependent Middle Eastern nations which is Eversendai’s main market.

Forecasts

• Unchanged. We project PATMI to recover 69% YoY this year, driven by better cost structure and strong job wins.

Rating

BUY TP: RM0.83

• With VOs and high start-up costs being a thing of the past, we now see more clarity in Eversendai’s earnings. Also supporting earnings are its strong RM1.1bn in new job wins last year and a potential record high of more than RM1.7bn this year. The strong US dollar is another added booster for earnings as more than 75% of its orderbook is in the Middle East whose local currencies are pegged to.

Valuation

• Our TP of RM0.83 is based on SOP method comprising (i) 10x FY15 earnings (ex. associates) and (ii) mark to market value of its 19% stake in SGX-listed Technics. This translates to FY15-16 P/E of 11.2x and 7.9x respectively.

Source: Hong Leong Investment Bank Research - 6 Mar 2015