Results

• Eversendai reported 3QFY16 revenue of RM317.4m (-12% QoQ, -21% YoY) and core earnings of RM3.9m (-76% YoY, -31% QoQ). Cumulative 9M core earnings (adjusted for forex and impairment) totalled RM42.9m (+40% YoY).

Deviation

• 9M core earnings made up 67% of our full year forecast (62% of consensus) which is below expectations.

Dividends

• None declared. Usually in 4Q.

Highlights

• Timing gap on jobs. We were negatively surprised to see the QoQ and YoY topline decline considering its sizable orderbook. Management guides this was due to the delay in commencement of several newly secured jobs resulting to a timing gap between the older jobs nearing completion.
• Malaysia in the red. The Malaysian operation suffered a slight loss (PBT: -RM1m) in 3Q. This segment has been suffering from razor thin margins since the beginning of the year attributed to insufficient topline to cover its fixed cost. Management expects things to improve once work on PNB118 (RM328m) commences.
• O&G bleeds further. The O&G division slipped further into the red in 3Q (PBT:-RM7m), from a small loss in 2Q. Due to delays in securing financing, progress on its 2 liftboats was set back while fixed cost continued to be incurred.
• Further impairments? We understand that there could be a potential impairment of at least RM10m relating to a project in Dubai that may be booked in 4Q.

Risks

• Eversendai is undertaking 2 liftboat contracts worth USD180m via an RPT. The liftboats are currently 50-80% complete with a 20% upfront payment and 80% upon completion. As the liftboats have yet to secure any charters, there are concerns on payment risk (and potential impairment) if its financing does not materialise.

Forecasts

• We cut FY16-18 by 21%, 17% and 15% respectively to reflect lower margins for its Malaysia and O&G operations.

Rating

Downgrade to HOLD, TP: RM0.54

• While Eversendai is backed by a record orderbook of RM2.7bn (1.5x cover ratio), strengthening USD and undemanding valuations, we reckon that any upside is likely to be capped by potential impairments in 4Q and payment concerns on its liftboats. As such, we downgrade our rating from Buy to HOLD.

Valuation

• Applying a P/E based valuation on Eversendai has proven challenging given its erratic quarterly earnings delivery. Our previous TP of RM0.88 was based on 8x FY16 earnings.
• Coupled with impairment risk, we feel it is appropriate to apply a P/B valuation instead. We ascribe a 1x P/B multiple on its hypothetical worse case BV to derive our TP of RM0.54. This assumes that upon completion, the receivables on the liftboats will be fully impaired.

Source: Hong Leong Investment Bank Research - 01 Dec 2016