Results

• Below Expectations: 3QFY15 core PATAMI swung from profit to losses of RM9m, bringing 9MFY15 to RM22m, making up 31% of HLIB and consensus full year estimates, respectively.

Deviations

• This is mainly due to lower than expected contribution from O&G segment while its plantation business continued to record losses.

Highlights

• 3QFY15 revenue fell by 31% YoY mainly due to lower contribution from O&G and industrial t rading. O&G revenue was lower due to decline in activities in the industry as oil producers deferred capex plan amidst low oil price. Polared project was completed in May 15.

• In 3QFY15, the company has secured about RM280m contracts from pipe coating, pengerang and engineering segment. QoQ, total orderbook decreased from RM1.1bn to RM974m (47% from oil and gas division, 32% from renewable energy and 21% from industrial trading & services).

• The latest tenderbook is about RM5bn (versus RM4.3bn in 2Q15) with 80% related to O&G jobs. In view of the low oil price and spending cut by E&P player, we are cautious on the orderbook replenishment rate. The current O&G orderbook of RM458m is a concern as it can only sustain for about a year.

• We also understand that around 92% of its borrowing is in US dollar but naturally hedged as its revenue is also denominated in US dollar. Potential exercise to spin off non O&G asset to unlock value might not materialize in the near term given current market sentiment.

Risks

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

Forecasts

• FY15 and FY16 earnings forecasts are reduced by 52% and 16% respectively after factored in lower contribution from O&G and industrial trading segment.

Rating

• Sell

Positives

• Strong balance sheet and acquisition record.

Negatives

• Acquisition fuelled growth - volatile in downturns.
• Capex burden developing Congo oil palm.

Valuation

• Given the challenging market outlook coupled with weakening results, we maintain Sell with TP reduced from RM1.01 to RM0.89 based on unchanged 9x FY16 P/E post earnings downgrade.

Source: Hong Leong Investment Bank Research - 30 Nov 2015