Highlights

• Hosts investor briefing. Yesterday, we attended Eversendai’s briefing post 4QFY15 results. To recap, FY15 recorded core earnings of RM48m, up +94% YoY.

• Competition eating up margins. Despite revenue hitting a record RM1.8bn in FY15, core net margin remained thin at 2.7% (FY14: 2.4%). This is a stark decline compared to the 6-12% recorded in FY11-13. Management explained that margins have thinned in recent times due to (i) heightened bidding intensity in the Middle East and (ii) the lack of iconic jobs which are generally more lucrative

• Temporary plateau. Having seen its orderbook doubling from RM1bn to RM2bn between 1QFY14 and 1QFY15, this appears to have plateaued around the RM1.7-1.8bn level over the past 3 quarters. Current orderbook of RM1.7bn implies a cover ratio of 1x on FY15 revenue.

• Stretched target set. Eversendai aims to amass RM2bn in new job wins this year (FY15: RM1.7bn), an all-time high if met. We reckon this would be a Herculean task considering its heavy reliance on the Middle East for jobs in this low oil price environment. Our FY16 job wins target is lower at RM1.4bn. Management begs to differ, citing that spending is likely to persist in nations like Abu Dhabi, Dubai (2020 World Expo) and Qatar (2022 FIFA World Cup).

• Jobs in the pipeline. Management guides that it could possibly announce RM500m worth of contract wins within the next month or so. This is likely to comprise structural steel for KL118 (RM300m) and other smaller jobs such as a power plant in Thailand, Jimah 3B and the Dubai Eye.

• Raises stake in Technics. Eversendai recently raised its stake in SGX-listed Technics O&G from 19% to 30%. With Eversendai emerging as the largest shareholder, it intends to eventually take an active management role in Technics. Share price of Technics has fallen from slightly above SGD1 in 2013 (when Eversendai first bought in) to SGD0.16 currently due to losses and recently, the falling out of a major divestment and reverse takeover plan.

Risks

• Spending slowdown in the Middle East given the low oil price environment. Historically, more than 70% of Eversendai’s new job wins comes from the Middle East.

Forecasts

• Lower FY16-17 earnings by 17% and 7% respectively after imputing lower margins on new job wins.

Rating

• Maintain BUY, TP: RM0.84
• We sense a more challenging landscape for Eversendai going forward. Nonetheless, this should not derail our investment thesis on Eversendai’s earnings rebound as evident by its recent 4Q results backed by margin recovery.

Valuation

• Following the earnings cut, our SOP (20% discount) based TP is reduced from RM0.99 to RM0.84, implying FY16-17 P/E of 10x and 7.6x respectively.

Source: Hong Leong Investment Bank Research - 4 Mar 2016