Results

• Below Expectations: The group posted core net loss of RM25.8m in 3Q16, bringing 9M16 core loss to RM39.6m, below HLIB and consensus expectations.

Deviations

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

Dividends

• Declared 1 st dividend of 0.5sen, a drop compared to corresponding period last year when 2.0sen was declared.

Highlights

• YoY: The group’s loss widened to RM25.8m (3Q15: net loss of RM9.0m) mainly due to (i) wider loss from O&G pipe coating division as a result of lack of work orders in the quarter and (ii) weaker performance at renewable energy division due to lower process equipment sales.

• QoQ: Its core loss widened further from preceding quarter (2Q16: net loss of RM11.8m) due to (i) weaker QoQ O&G revenue on the back of dwindling number of projects done and (ii) sequential weakness in renewable energy division (lower process equipment contracts secured). Meanwhile, Industrial trading revenue was lower on the back of weaker demand.

• YTD: 9M16 core loss of RM39.6m was reported vs. RM15.9m core net profit reported 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.

• 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 needs to handle to mega Nord Stream 2 project. Given the challenging outlook of the overall O&G industry, the group is likely 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 core loss forecast is widened to RM57.7m from RM24.1m. FY17/18 forecasts are reduced by 13/12% as we reduce our O&G division and renewable energy margin assumptions.

Rating

• HOLD ( )

• Nord Stream 2 mega project is expected to be a major contribution to group in the next 3 years but we are concerned on its margin. Financing for the working capital of the project yet to finalize, indicating potential risk of cash mismatch in the future. Meanwhile, prospects of further orderbook replenishment remains uncertain at this juncture.

Valuation

• TP is reduced to RM0.84 from RM1.00 pegged to unchanged 10x CY17 target PER. Downgrade the stock to HOLD .

Source: Hong Leong Investment Bank Research - 30 Nov 2016