Results

• Below Expectation: Reported 9MFY16 core PATAMI of RM39.2m, making up 50.1% and 53.4% of our earnings and consensus estimates

Deviations

• Weaker than expected margins and revenue recognition of Offshore business due to low orderbook replenishment and additional cost provisions.

Highlights

• In 3Q16, the group posted a loss of RM1.8m, which is smaller than the loss registered in 3Q15, underpinned by absence of major contract cost provision (Malikai TLP in 3Q15). This is despite a drop in overall revenue YoY driven by lower Offshore and Marine revenue on the back of low contract recognition and lower number and value of LNG vessels repaired in the quarter.

• Qoq, 3Q16 core loss of RM1.8m is reported against RM11.2m profit registered in preceding quarter due mainly to recognition of claims of variation orders for Malikai in preceding quarter upon approval from client. This is being offset by higher Marine revenue and operating profit mainly on higher work value recognised in 3Q16.

• Cumulatively, 9M16 core net profit surged 34% YoY to RM39.2m mainly due to absence of major project cost provision (i.e. Malikai project last year). This has resulted in improved profitability YoY despite lower revenue for both Offshore and Marine business divisions due to lower project done and lower LNG and rig repairs.

• At this juncture, projects running on the yard are (i) Besar-A Jacket & Topside (90% completed) (ii) Baronia CPP Jacket (74% completed), (iii) Petronas FLNG-2 Turret (66% completed) and (iv) F12 Kumang Topside (51% completed). These projects are scheduled to be completed in 1H17, leaving a potential revenue gap from then onwards.

• The company is currently pursuing variation orders claims for Tapis and Malikai projects. Latest orderbook stood at RM686.1m, lower than the level seen in preceding quarter with majority of backlog comprising of RAPID works and F12 Kumang Topside.

Risks

• Project execution risk and Orderbook replenishment risk.

Forecasts

• FY16/17 core earnings forecasts are cut by 28/38% after assuming lower Offshore orderbook replenishment and lower margins due to expectations of higher contract provisions.

Rating

HOLD (↑)

• Despite the upgrade in recommendation, we believe 2016 contract replenishment remains a risk to its 2017 earnings outlook. The Marine division, despite being robust in previous quarters, is also seeing some weakness this year post completion of major LNG ship repair and conversion contract.

Valuation

• Upgrade to Hold form Sell with TP maintained at RM0.94

based on 0.6x BV.

Source: Hong Leong Investment Bank Research - 28 Oct 2016