News

• From investment to associate. Eversendai announced that it has raised its stake in SGX-listed Technics O&G from 19.6% to 29.9%, making it the single largest shareholder. Following the appointment of the former’s representatives to the latter’s Board of Directors, Technics is now an associate of Eversendai.

Comments

• Background on Technics. Technics specialises in the design and fabrication of complexed and customised process modules and equipment, including gas compression packages, which are integrated to form the operating system for production operations and storage applications in both O&G onshore and offshore E&P activities.

• Recap of past events. To recap, Eversendai initially acquired an 18.6% stake in Technics back in Nov 2012 and Jan 2013 at a price range of SGD1.03-1.05 per share. Technics subsequently became an associate of Eversendai in 1QFY13 but eventually ceased in 4QFY14 when the latter no longer had any Board representation in the former.

• Battered share price. Technics’ share price has largely been down trending since the initial entry of Eversendai (see Figure #1). This year, Technics shares were suspended for the entire month of Jan until mid-Feb as it was negotiating on a major divestment and reverse takeover plan. Upon the lifting of suspension, its share price plunged 81% as the deal failed to push through.

• Taking an active role. After the increased stake in Technics, Eversendai’s average share price cost is estimated at SGD0.73/share (current price: SGD0.19/share). Apart from re-emerging an associate of Eversendai, its MD, Tan Sri AK Nathan has also been appointed as the MD of the Technics. We read these 2 developments as a sign that Eversendai intends to take a more active role in the management of Technics. Further, it has always been Eversendai’s aspirations to expand its structural steel expertise into the O&G segment.

Risks

• Inability of Eversendai to turn around Technics as the latter is in the red (1QFY16 net loss of -SGD1.2m).

Forecasts

• Forecasts unchanged pending more clarity by management on the turnaround plans for Technics. Downside to earnings is likely should Technics fail to return to the black.

Rating

• Maintain BUY, TP: RM0.84
• We are negative on the increased stake in Technics given the potential drag from associate losses. 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

• Our SOP based TP remains unchanged at RM0.84 which ascribes a 20% discount. This has already been adjusted for the additional stake in Technics. The FY16-17 implied P/E at our TP is 10x and 7.6x respectively.

Source: Hong Leong Investment Bank Research - 5 Apr 2016