Results

• Below Expectation: 12MFY16 core loss stood at RM1.5m, below ours (+RM55m) and consensus (+RM50.6m) estimates.

Deviations

• Weaker than expected Offshore margins and smaller than expected variation orders approved and claimed during the period under review.

Highlights

• YoY: In 4Q16, the group posted a loss of RM40.3m vs profit of RM57.3m in 4Q15. Offshore revenue plunged by 72% on the back of lower backlog intake and order executed upon completion of major projects, resulting in RM34.4m operating loss. Marine revenue increased on higher value of vessels repaired from LNG and FPSO conversion works (Bergading FSO).
• QoQ: Core loss widened to RM40.3m from RM1.8m loss in the preceding quarter mainly dragged by weaker Offshore revenue upon lower work done. This is being partially offset by stronger QoQ Marine revenue and operating profit due to higher value of vessels being repaired.
• FY16 core net loss was at RM1.5m compared to profit of RM86.5m in the year before. This is mainly due to weaker Offshore revenue caused by absence of major projects of significant size in 2016 compared to 2015 , resulting topline could not cover its overhead expenses. Marine topline suffered YoY but operating profit was up in contrast due to higher portion of high margin vessel maintenance work being done.
• At this juncture, the fabrication projects running on the yard are (i) Besar-A Jacket & Topside (90% completed) (ii) Baronia CPP Jacket (90% completedand (iii) F12 Kumang Topside (66% completed). These projects are scheduled to be completed in 1H17, leaving a potential revenue gap from then onwards.
• Marine remained busy with LNG and FPSO vessels converted on top of multiple en-bloc ship repair jobs for foreign clients in 2016. However, we believe activities for Marine would normalise downwards as the ship repair cycle slows.
• Variation orders (VO) approved and claimed in 2016 was worth RM60.5m. We do not anticipate further application for VO approvals on its previously executed projects.

Risks

• Project execution risk and orderbook replenishment risk.

Forecasts

• FY17/18 core earnings forecasts are cut by 9.8/15% as we lower our assumptions and margins for Offshore work orders.

Rating

HOLD (↔)

• Near term earnings outlook remains bleak with orderbook replenishment in 2016 insufficient to cover for 2017 top line. However, industry outlook has turned brighter this year with more jobs expected to be dished out. The extent of recovery, however, is still uncertain.

Valuation

• TP is revised to RM1.11 from RM1.06 previously, based on 0.7x FY17 PBV adjustments in full year consolidated balance sheet.

Source: Hong Leong Investment Bank Research - 08 Feb 2017