Results

• Below expectations. 2Q17 core net profit came in at RM6.5m, bringing 1H17 core earnings to RM13.0m, accounting for 28.4% of HLIB and 17% of consensus.

Deviations

• Slower than expected ramp up of Nord Stream 2 project.

Dividends

• None.

Highlights

• YoY: Core profit of RM6.5m was posted against loss of RM11.8m last year mainly due to improvement in O&G segment upon Nord Stream 2 project ramp up in 2Q17. Partially offsetting the increase was the weaker contribution from Renewable Energy division due to lower contracts done for process equipment and Kernel Crushing Press.
• QoQ: Flattish growth recorded in core profit. Stronger sequential performance in O&G segment (due to pipe coating contract ramp up) was offset by higher interest costs and higher industrial trading losses caused by lower building material and spiral steel pipe sales.
• 1H17: The group posted core profit of RM13m against core loss last year due to significant jump in O&G contribution on the back of Nord Stream 2 project contribution. This was partially offset by weaker Renewable Energy and Industrial Trading contribution due to weak market.
• The group’s major pipe coating plants (In Mukran and Kotka) are running at close to full steam at this juncture and we expect higher Nord Stream 2 project revenue contribution in 2H17. .
• Its current orderbook stand at RM3.7bn, of which RM3.5bn is O&G. Nord Stream 2 takes up significant portion of its orderbook and cost management of the project is essential to the group’s profitability.

Risks

• Political risk, Congo Oil Palm Plantation.
• Execution risk.

Forecasts

• Cut FY17 core earnings by 30.1% to factor in slower ramp up of Nord Stream 2 project. Maintain FY18-19 forecasts.

Rating

SELL (↓ )

• While ramp up of Nord Stream 2 project is ongoing, we believe the positive prospects of the mega project have been priced in and we are wary of its potential project cost overrun risk due to its logistical and political complexity.
• Downgrade to Sell as share price has run ahead of its fundamental.

Valuation

• TP is maintained at RM0.91 pegged to 10x FY18 PER.

Source: Hong Leong Investment Bank Research - 29 Aug 2017