Results

• Within expectations: 4Q16 core net profit came at RM4.2m, bringing is FY16 core earnings to RM23.0m, accounting for 96% of our forecast but below consensus at 85%.

Deviation

• None.

Dividends

• None.

Highlights

• YoY: Excluding FOREX gain of RM11.8m, core net profit plunged 56.2% in 4Q16 due to higher interest cost (post borrowings increase upon Tanjung Baram project commencement) and higher OPEX.
• QoQ: Core net profit was halved to RM4.2m in 4Q16 dragged by (i) increase in finance cost and (ii) higher admin and operational costs. This is excluding the FOREX impact on the numbers.
• YTD: FY16 core PATAMI declined by 42.1% YoY mainly underpinned by (i) weaker Trading segment top line due to lack of demand for chemical products (ii) higher interest cost due to increase in borrowings (drawn down for Tanjung Baram RSC) and (iii) weaker JV contribution due to slow down in activities of the oil and gas sector in 2016.
• We believe that there will not be any recognition in rent fee from Tanjung Baram RSC in the next 2 years if low oil prices persist due to slower CAPEX recovery and no profits will be recognized.
• Developments have turned slightly more positive in this year with additional earnings expected to come from D18 water injection project in 2017.
• Instead of embarking on acquisition spree like last year, the group will streamline its existing business as some of the businesses acquired last year have duplications in terms of their operations. Cost savings can be seen in recent quarters, showcasing the group?s capability to keep its structure lean in such turbulent times in the market.

Risks

• Delays in contract disbursement.
• Execution risk.

Forecasts

• FY17/18 is revised upwards slightly by 2.9/2.9% after book keeping adjustments for full year 2016 results. .

Rating

HOLD (??)

• We opine that recent sell down in the stock has priced in the bleak earnings outlook of the group. Nevertheless, we believe the potential recovery in earnings of the group is not sufficient to justify a rerating of the stock at this juncture.

Valuation

• Maintain Hold with TP increased slightly to RM1.70 from RM1.66 pegged to 12x CY17 PER post earnings adjustment.

Source: Hong Leong Investment Bank Research - 27 Feb 2017