We recently met up with Rohas’ management. The shocking loss of 4Q18 results is mainly due to cost overruns amounting to more than RM10m in HGPT’s legacy projects. The projects make up 3% of Rohas’ order book and are expected to complete in mid-2019. Laos EPCC project (RM300m) has been progressing ever since changing of scope last year. This project is expected to finish this year and unbilled amount is at RM200m. Rohas 49%-owned 7MW Lawe Sikap mini-hydropower plant in Indonesia is expected to start contributing in 2Q19 and we estimate that the net contribution to Rohas is c.RM4m annually. Maintain forecast and HOLD rating with unchanged TP of RM0.64 (11x FY19 earnings).

Below Are the Key Takeaways From Our Recent Meeting With Rohas’ Management.

Cost overruns explained. Much of the meeting was centred on its shocking 4Q18 results with core losses at RM3.8m, representing its first core loss recorded since RTO. This was mainly due to cost overruns amounting to more than RM10m for 2 legacy projects in HGPT before it was acquired by Rohas. The cost overruns were mainly due to challenging terrain involved in the projects. One has been completed while another project makes up c.3% (RM16m) of Rohas’ orderbook and is expected to be completed in mid-2019 with completion rate of c.90% It will be submitting variation order (VO) claims for the additional cost incurred although the quantum has yet to be finalised. Management guided that normalized earnings of HGPT should be c.RM10m per annum and should revert back to that level in FY19.

EPCC segment. Laos EPCC project (RM300m) has been progressing ever since changing of scope last year. This project is expected to finish this year and unbilled amount is at RM200m. EPCC orderbook currently stands at c.RM600m, representing c.2.5x cover ratio of their FY18 EPCC revenue. The company is targeting for orderbook replenishment of RM400m this year.

Tower segment. Revenue from tower fabrication segment decreased 13% YoY in FY18 due to decrease in deliveries. This is due to delay in work orders from clients after changing of government post GE14 that caused slowing down of work. Management admitted that the slowdown is worse than expected but is hopeful for things to normalize in FY19. Outstanding orderbook is at c.RM140m and they are aiming to replenish RM150m this year.

Mini-hydro to contribute this year. Rohas 49%-owned 7MW Lawe Sikap mini hydropower plant in Indonesia is expected to start contributing in 2Q19 and we estimate that the net contribution to Rohas is c.RM4m annually.

Forecast. Maintain earnings forecast as we already factored in cost overruns in our 4Q18 results review report.

Maintain HOLD, TP: RM0.64. Maintain HOLD with unchanged TP of RM0.64. TP is pegged to 11x PE multiple on FY19 EPS. Although earnings appear to have bottomed, general slowdown in domestic infrastructure spending could deter potential earnings recovery.

Source: Hong Leong Investment Bank Research - 6 Mar 2019