Results

• Above HLIB but within street. 3Q17 core net profit came in at RM33.7m, bringing 9M17 core earnings to RM46.0m, accounting for 106% of HLIB but within consensus at 71%.

Deviations

• Higher than expected pipe coating revenue recognition and margins.

Dividends

• None.

Highlights

• YoY: Core profit of RM33.7m was posted against loss last year due to higher O&G revenue recognition as Nord Stream 2 project going on full steam. This was being partially offset by weaker margins in renewable division.

• QoQ: Profit surged 4-fold thanks to ramp up of Nord Stream 2 pipe coating contract and lower loss from industrial trading division due to improvement in trading volume.

• 9M17: Core PATAMI of RM46.6m was registered against loss last year mainly due to contribution of Nord Stream 2 pipe coating project. .

• The group’s major pipe coating plants (In Mukran and Kotka) are already running at double shift at this juncture and we expect higher Nord Stream 2 project revenue contribution in 4Q17.

• Its current orderbook stand at RM3.4bn, of which RM3.1bn 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.

• Its tenderbook is at RM4.7bn, which can potentially help to sustain its revenue momentum beyond 2019 upon expiry of Nord Stream 2 project.

Risks

• Political risk, Congo Oil Palm Plantation.

• Execution risk.

Forecasts

• Raise FY17E/18F/19F earnings by 80/39/37% to account for higher Nord Stream 2 revenue recognition and margins.

Rating

HOLD

• Ramp up in Nord Stream 2 pipe coating contract has provided strong earnings visibility for the group in the next 2 years. However, we believe the recent surge in share price has priced in its positive earnings prospects.

Valuation

• TP is increased to RM1.25 from RM0.91 pegged to unchanged 10x FY18 PER post earnings upgrade.

Source: Hong Leong Investment Bank Research - 30 Nov 2017