Results

• Below Expectations: 4QFY15 core PATAMI came in at RM17.7m, bringing FY15 to RM32.3m, making up 92% and 81% 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

• 4QFY15 revenue slumped 73.2% YoY due to significantly slower O&G division due to project deferments, weaker industrial trading & services division arising from project delay of pipe manufacturing business and slowdown in building material post GST implementation. This is being partially offset by stronger performance from its renewable energy segment on the back of higher process equipment sales

• Plantation segment remained a loss-making division for the group with RM20.3m loss recorded for FY15. It is not expected to breakeven until after 2018 as it goes through a gestation period for the palm oil trees to mature.

• Company orderbook has dwindled slightly to RM894m from RM974m with 54% consisting of O&G contracts, 29% renewable energy and the remaining industrial trading & services. Orderbook replenishment remains a main concern for the company with O&G project awards expected to slow down significantly in the medium term.

• The latest tenderbook stands at 6.7b with majority of projects trendered in on the O&G segment. We believe chances of securing major O&G contract in the near terms are slim given the anticipated slowdown in contract awards.

• 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 the current subdued market sentiment.

Risks

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

Forecasts

• FY16 core net profit reduced by 11.7% after accounting for lower O&G revenue with slower work orders. FY17 core net profit forecast of RM74m is introduced on weaker O&G orderbook replenishments.

Rating

• Hold ()

Positives

• Strong balance sheet and acquisition record.

Negatives

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

Valuation

Notwithstanding the challenging market outlook coupled with weakening results, we upgrade the stock to HOLD from SELL due to the recent share price retracement. TP is reduced to RM0.79 from RM0.89 based on unchanged 9x FY16 P/E post earnings downgrade.

Source: Hong Leong Investment Bank Research - 1 Mar 2016