Results

• Above expectations: 2Q16 core net profit came in at RM8m, bringing 1H16 core loss to RM18.4m, above our expectations (net loss of RM62m) but below consensus (net profit of RM54.4m).

Deviations

• Stronger recovery in HUC works orders and Marine performance.

Highlights

• YoY, 2Q16 core net profit plunged by 77.3% to RM8m due to lower vessel utilisation for Perdana amid weak OSV market and lower HUC work order amid low activity level.

• On a QoQ basis, the group reversed to RM8m profit from loss of RM26.4m in the preceding quarter due to significant higher HUC work orders performed and higher marine vessel utilisation on the back of recovery of oil prices from multi-year low in 1Q16.

• Cumulatively, the group posted a loss of RM18.4m in 1H16 vs. core net profit of RM69.7m in 1H15 mainly underpinned by significantly lower vessel utilisation for Perdana YoY and dip in HUC work orders as its major clients slowed down the activities in view of low oil prices.

• As 2Q is usually the weakest quarter for the company due to monsoon season, we expect the company to report stronger numbers in the coming quarters as we anticipate stronger activities for its HUC contract post recovery of oil prices from multi-year low of USD20/bbl to USD48/bbl in 2Q16.

• In April, the group completed the issuance of Sukuk Murabahah worth RM635m guaranteed by Danajamin Nasional Berhad to adhere to the Shariah laws. This loan has tenure of 12 years from the date of issuance, reducing the group’s credit risk in the near term. We also gather that the finance cost of the refinanced loan would be similar to before thus making this debt issuance earnings neutral to the company.

Risks

• Political risk; Delays in contract disbursement; and Execution risk.

Forecasts

• We raise our forecast for FY16 and FY17 to profit of RM0.5m and RM41.1m respectively in anticipation of recovery in HUC activities and marine vessel utilisation.

Rating

HOLD

• Positives –
• solid track record and expertise in HUCC.
• captive market for topside maintenance.
• Negatives –
• Slowdown in O&G activities.

Valuation

Upgrade to HOLD with higher TP of RM1.11 from 0.84 based on higher CY17 PBV of 0.8x. We believe the company deserves a modest rerating in valuation due to its resilient recovery in its bread and butter HUC business.

Source: Hong Leong Investment Bank Research - 25 Aug 2016