• No more negative surprises. While 1H core earnings were positive, reported numbers indicated a loss of RM72m due to RM102m impairment for its 29.9% stake in Technics. Management guides that as of end 2Q, its entire stake of RM130m in Technics has been fully impaired with no carrying value on its balance sheet. We are comforted that the group decided to bite the bullet and move on and focus on their core businesses.

• Bullish orderbook to offset potential payment risks of liftboat contract. Despite lingering payment risk concern on its liftboat contract (as the remaining 80% of the contract amount would only be paid upon completion of the lift boats), from a core earnings standpoint, its recovery appears to be panning out well. In our (rather extreme) worst case scenario whereby Sendai has to write off the entire receivables on the liftboats , we es timate that it’s BV per s hare would fall from RM1.27 to RM0.53 (0.84x P/B), which is still 17% above current share price and 16% below its 10-year historical average of 1x.

• On a brighter note, SENDAI has managed to amass RM1.5bn worth of new job wins YTD (FY15: RM1.7bn). Management is hopeful to hit the RM2bn mark in new job wins by year end as it has RM20bn worth of tenders (structural steel: RM9bn, O&G:RM11bn) in the pipeline. Its orderbook has now hit a new high of RM2.4bn, translating to a cover ratio of 1.4x on FY15 revenue, providing earnings visibility for the next 1.5 years. HLIB institutional Research remains upbeat on SENDAI with a lowered target price of RM0.66 (+46.6% upside).

• Values emerge. We see limited downside risks as the stock is trading at an attractive P/E of 5.4x and 4.5x (10-year average 19x) on FY16-17 earnings with current P/B at 0.35x (close to its 10-year historical low of 0.34x). We believe such steep valuations have priced in most of the negatives and provided sufficient margin of safety to cushion further sharp share price decline.

• Following a 3M range bound consolidation, we believe SENDAI is ripe for a breakout soon, supported by signs of bottoming up in hourly indicators and tapering selling pressures, implying imminent rebound in near term. A decisive breakout above immediate resistance of RM0.475 (23.6% FR) could take the next leg up towards RM0.515 (38.2% FR) before testing our LT objective at RM0.585 (61.8% FR and 30-w SMAs). On the flip side, key supports are RM0.435 (14 Sep low) and RM0.405. Cut loss at RM0.40.

Source: Hong Leong Investment Bank Research - 15 Sep 2016