Rohas’s 1HFY19 earnings of RM7m (-55% YoY) were below our expectations mainly due to lower margin. YTD core PATAMI decreased due to lower contribution from tower fabrication segment and higher operating expenses. Outstanding EPCC order book of RM400m translates into 1.7x cover ratio. Cut FY19-21 earnings forecast by 5-6%. Maintain HOLD with lower TP of RM0.57 (from RM0.60) after earnings forecast adjustment, based on 11x PE multiple pegged to FY19 earnings.

Below expectations. Rohas reported 2QFY19 results with revenue of RM127.0m (+35% QoQ, +41% YoY) and core earnings of RM3.8m (+44% QoQ, -43% YoY). This brings 1HFY19 core earnings to RM6.5m, decreasing by 55% YoY. The core earnings accounted for only 25% of our full year forecast which is below expectation. Core earnings were adjusted for one-off exceptional item amounted to RM7.4m as a final settlement for a claim of breach of warranties under the terms of the share sale agreement for the acquisition of HGPT.

Deviations. The lower than expected performance was mainly due to lower margin attributable to higher mix of EPCC revenue which garner a lower margin than tower fabrication business.

QoQ. Core PATAMI increased by 44% attributable to higher revenue contribution from all segments.

YoY. Core PATAMI decreased by 43% due to lower telecommunication towers deliveries and lower margin due to higher mix of EPCC revenue.

YTD. Core PATAMI decreased by 55% due to lower revenue contribution from tower fabrication segment and higher operating expenses.

One-off item. We understand that the one-off exceptional item amounting to RM7.4m is due to cost overruns issue in HGPT legacy projects, among other things. To recap, Rohas was plagued by cost overruns issue last year by HGPT legacy projects that were awarded before it was acquired by Rohas.

Orderbook. EPCC segment outstanding orderbook currently stands at c.RM400m which translates into 1.7x cover ratio of FY18 EPCC revenue. Tower fabrication orderbook stands at about RM200m, representing 1.3x cover ratio of FY18 tower fabrication revenue.

Forecast. Cut FY19-21 earnings by 5.4%, 4.8% and 5.9% respectively after adjusting lower EPCC margin.

Maintain HOLD, TP: RM0.57. Given the results weakness, we maintain our HOLD rating with lower TP of RM0.57 (from RM0.60) following the earnings cut. TP is pegged to 11x P/E multiple to FY19 earnings.

Source: Hong Leong Investment Bank Research - 3 Sept 2019