Results

• Within Expectation: YoY, 1QFY16 core PATAMI stood at RM29.9m, making up 38.2% and 29.1% of our earnings and consensus estimates.

Deviations

• While 1Q16 results appear to be strong, w e deem it w ithin our expectations as w e anticipate w eaker numbers for the rest of the year w ith completion of major fabrication projects and no signif icant replenishment to make up for the shortfall.

Highlights

• 1QFY16 revenue dipped 64.3% YoY as its major projects (Malikai & Besar) come to completion. This w as despite higher Marine revenue contribution YoY (+14%) on higher value for vessels repaired f rom LNG, FPSO, and FSU categories inclusive of settlement of carried forw ard projects in the current quarter. Therefore, overall core PATAMI decreased 17.1% YoY.

• Mailkai TLP project has undergone successful cross-over in March and is currently on a barge undergoing sea-testing. Full completion of the project is expected to be in 3QFY16. Besar and NMB Bergading projects are close to completion at 87% and 97% respectively and w e expect completion of most of these projects by end of 2016.

• The company is pursuing variation orders claims for Tapis and Malikai projects. None of the claims is recognised in the company’s numbers yet. Successful claim w ill help to boost earnings. We have not factored in any variation orders in our earnings forecast.

• Latest orderbook stood at RM1.0bn, similar to the level seen in the preceding quarter w ith majority of backlog comprising of RAPID w orks. The group submitted RM1.8b w orth of tenders for 2016 out of total RM7.4b in potential tenders for year 2016-2017.

• Focus w ould still be directed to RAPID prefabrication contracts w hich w ould be in smaller quantities (RM200-300m each) in view of challenging upstream outlook.

• We believe the ability to secure local fabrication projects w ould be key positive catalyst i.e. Baram Delta Wellhead Platform & CPP packages rumoured to be aw arded later this year. Nevertheless, orderbook replenishment this year, in our opinion, w ould not be suf f icient to sustain the group’s revenue base.

• The group’s Marine division is expected to remain busy f or the rest of the year w ith resilient demand for marine maintenance seen despite w eak industry activities. It is also contemplating an addition of 3rd dry dock to expansion its strong-performing Marine division.

Risks

• Project execution risk and Orderbook replenishment risk.

Forecasts

• Earnings estimates maintained.

Rating

SELL

Positives

• Room to enhance yard capacity and capability. Net cash balance sheet.

Negatives

• History of delivery delays and earnings disappointments. High contract replenishment risk due to oil price slump.

Valuation

• Maintain Sell w ith unchanged TP of RM0.94 based on 0.6x BV due expectation of w eaker orderbook replenishment.

Source: Hong Leong Investment Bank Research - 28 Apr 2016