Results

• Below Expectations: The group posted core net loss of RM11.8m in 2Q16, bringing 1H16 core loss to RM13.8m, below ours and consensus expectations.

Deviations

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

Highlights

• YoY, the group slipped into core loss of RM11.8m in 2Q16 from profit in a year before as its O&G division revenue halved and dipped into losses as a result. That aside, renewable energy division also experienced YoY weakness in revenue with margins remaining largely intact.

• QoQ, its core loss widened further from preceding quarter due to (i) weaker QoQ O&G revenue due to dwindling number of projects done and (ii) sequential weakness in renewable energy division as a results of lower process equipment contracts secured. Meanwhile, Industrial trading revenue remained flattish on a QoQ basis,

• Ytd, 1H16 core loss of RM13.8m was reported vs. RM25m core net profit in a year before. This is mainly underpinned by slower O&G revenue with negative margins and lower renewable energy revenue in line with lesser work done.

• Overall, we do not expect earnings of the group to return to the black this year. However, we anticipate significantly stronger 2017 numbers as Nord Stream 2 mega pipe coating project starts to kick in.

• Further confirmation of Nord Stream 2 pipe coating contract would boost the group’s orderbook by more than 50% and is expected to anchor the group’s earnings in the next 2 years.

• The group may need external financing for its working capital to handle to mega Nord Stream 2 project. Given the challenging outlook of overall O&G industry, the group might need to look at equity fund raising as debt financing might be hard to come by with potentially high finance costs.

Risks

• Political risk, Congo Oil Palm Plantation.

• Execution risk.

Forecasts

• FY16 forecast is cut to loss of RM17.5m from a profit position to account for lower O&G division revenue and margins. FY17 forecast is maintained.

• Buy

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

Valuation

• TP is maintained at RM1.00 pegged to unchanged 9x CY17 target PER. With financing issues expected to be resolved before end of this year, we believe the finalization of Nord Stream 2 pipe coating project would be a key catalyst to its share price. Maintain BUY.

Source: Hong Leong Investment Bank Research - 1 Sep 2016