Results

• Below Expectation: 1H17 core loss stood at -RM10.6m, below HLIB’s FY17 (+RM27.0m) and consensus (+RM22.1m) estimates.

Deviations

• Weaker than expected Offshore margins.

Highlights

• YoY: In 2Q17, core loss of RM9.8m was reported against profit of RM10.8m in 2Q16 due to weaker Offshore division driven by lower work done and higher JV losses. This is being partially offset by stronger Marine performance due to more conversion work being done.
• QoQ: Core loss widened in the quarter mainly due to higher JV losses dragged by lower revenue at JV level and recognition of tax expenses in contrast to tax credit in the preceding quarter.
• 1H17: Loss of RM10.6m was registered against core profit of RM40.7m mainly underpinned by weaker Offshore performance due to lesser job done and higher JV losses.
• Most of the major Offshore projects were completed in 1H17 (i.e. Besar, F12 Kumang Topside, Baronia CPP). RAPID-related projects are still underway with 4 more packages to go. The group is only left with one major project (Bokor CPP) but bulk of the project earnings would only come in 1H18 as it is currently in engineering phase.
• As at June 17, the group’s orderbook stood at RM1.6bn comprising mainly of Bokor CPP and RAPID-related projects.
• Modification, Construction and Maintenance (MCM) project award by Petronas (which was earlier been rumoured to be dished out in 2017) has been deferred further, dampening the group’s orderbook replenishment outlook for 2017.

Risks

• Project execution risk and Orderbook replenishment risk.

Forecasts

• FY17 core earnings forecast is cut to loss of RM25m (from profit of RM27m previously) while FY18/19 earnings is trimmed by 11% as we adjust for lower Offshore revenue recognition and margin.

Rating

HOLD (↓ )

• ? Weaker than expected orderbook replenishment and deferment of major MCM project has reduced likehood of the group turning into black this year. We do not foresee major earnings catalyst in the near term.

Valuation

• TP is cut to RM0.67 from RM1.13 previously as we ascribe lower FY18 PBV of 0.4x from 0.7x. Downgrade to HOLD.

Source: Hong Leong Investment Bank Research - 04 Aug 2017