Results

• Above expectations. 4Q17 core net profit came in at RM39.1m, bringing FY17 core earnings to RM85.7m, accounting for 108% of HLIB and 114% of consensus.

Deviations

• Higher than expected pipe coating revenue recognition.

Dividends

• None.

Highlights

• YoY: Core profit of RM39.1m was posted against loss last year due to higher O&G revenue recognition as Nord Stream 2 project going on full steam.
• QoQ: Profit increased by 16.2% due to higher revenue contribution from all segments.
• FY17: Core PATAMI of RM85.7m was registered against loss last year mainly due to contribution of Nord Stream 2 pipe coating project. .
• Its current orderbook stands at RM2.8bn, of which RM2.5bn is in O&G. Nord Stream 2 takes up significant portion of its order book and cost management of the project is essential to the group’s profitability.
• Its tender book is at c.RM5.0bn, which can potentially help to sustain its revenue momentum beyond 2019 upon expiry of Nord Stream 2 project.
• Outlook: We understand that balance sheet deleveraging exercises has been ongoing and we expect management will reduce net gearing level of the company through disposal of non-core assets (including its Congo plantation) going forward.

Risks

• Political risk,
• Execution risk.

Forecasts

• Raise FY18-19 earnings by 7.1% and 6.8% respectively to account for higher Nord Stream 2 revenue recognition.

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

• Maintain HOLD with higher TP of RM1.48 (from RM1.38) pegged to unchanged 11x FY18 PER post earnings upgrade.

Source: Hong Leong Investment Bank Research - 27 Feb 2018