Results

• Below Expectations: The group posted core net loss of RM2m in 1QFY16, below ours and consensus expectations.

Deviations

• Weaker than expected performance from JVs and margin erosions on core business.

Highlights

• The group turned into a loss of RM2m in 1Q16 from profit of RM13.6m in 1Q15 due to weaker O&G and Industrial trading business divisions due to slowdown in overall industry activity. O&G division reversed a loss of RM6.2m in the quarter due to lower work orders and erosion in contract margins. Industrial trading segment was also weaker QoQ and YoY due to slowdown in construction of residential and commercial properties coupled with post-GST impact on sales.

• Plantation segment remained a loss-making division for the group with RM1.2m loss recorded for the quarter. It is not expected to breakeven until after 2018 as it still goes through a gestation period for the palm oil trees to mature.

• Company orderbook dwindled further to RM715m from RM894m with 52% consisting of O&G contracts, 31% renewable energy and the remaining industrial trading & services. Orderbook replenishment remains a main concern for the company given the expected slowdown in O&G project awards in the near term. Delays in Petronas Canadian project have also dampened the group’s contract replenishment outlook in the medium term.

• The latest tenderbook stands at RM5b, comprising mostly O&G projects. We believe chances of securing major O&G contract in the near term 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 and FY17 core net profit forecasts reduced by 88.2% and 61.8% after accounting for lower O&G margins and losses from JV (comprising of Petra Energy and Alam).

Rating

Sell

• Positives – Strong balance sheet and acquisition record.
• Negatives – Acquisition fuelled growth - volatile in downturns; Capex burden developing Congo oil palm.

Valuation

• TP is reduced to RM0.49 from RM0.79 previously as we roll forward our valuation to CY17 pegged to unchanged 9x target PER. No near term rebound signs are seen on the company’s earnings amid orderbook replenishment weakness and deferment of major O&G projects. Downgrade the stock to Sell.

Source: Hong Leong Investment Bank Research - 31 May 2016