Results

• Above expectations: 4Q17 core PATAMI came in at RM34.2m (qoq: +64.9%; yoy: core loss in 4Q16), bringing FY17 core PATAMI to RM44.3m against core loss in FY16. It is way above HLIB (-RM25.0m) and consensus estimates (-RM5.8m).

Deviations

• Higher than expected operating profit from both Heavy Engineering and Marine segments.

Highlights

• YoY: In 4Q17, core PATAMI of RM34.2m was posted against core loss of RM40.3m in 4Q16 mainly due to recognition of change orders in Heavy Engineering segment, partially offset by lower contribution from Marine segment due to lower contract value and number of vessels repaired.
• QoQ: Core PATAMI increased by 64.9% due to higher contribution from Heavy Engineering segment, partially offset by lower revenue from Marine segment.
• FY17: Core PATAMI of RM44.3m was posted against core loss in FY16 due to lower operating loss caused by recognition of change orders and finalisation of completed projects in FY17 in Heavy Engineering segment, partially offset by lower contribution from Marine segment.
• Most of the major Heavy Engineering 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 its earnings would only come in FY19 as the first steel cut is expected in 3Q18.
• As at December 17, the group’s order book stood at RM1.27bn (1.3x FY17 revenue cover) comprising mainly of Bokor CPP (c.79% of total order book). The group is bidding for RM4.0bn worth of jobs comprising mainly of local jobs (80% of tender book).

Risks

• Project execution risk and order book replenishment risk.

Forecasts

• We raise FY18-19 earnings forecast by 5.1% and 0.6% respectively after raising order book replenishment assumptions to take into account potential pick up in upstream activities stimulate by recent recovery in oil price.

Rating

HOLD (↔)

• While earnings headwind is still present, industry outlook has turned brighter this year with more jobs expected to be dished out.

Valuation

• Maintained HOLD with unchanged TP of RM0.85 pegged to unchanged 0.5x FY18 BVPS.

Source: Hong Leong Investment Bank Research - 14 Feb 2018