PENB started off the year looking promising for a turnaround, however circumstances have changed with higher operating cost anticipated in 2H17. 1H17 reported revenue of RM170.8m achieved 45% of our full-year forecasts, however core net profit missed our estimates, accounting for only 21% of full year estimates. In view of this, we now expect the company to register a loss in 2017E due to the reason mentioned above. We lower our TP to RM1.03 and downgrade the stock a HOLD.

Better 1H17 Performance, But Not So Optimistic 2H17

PENB reported a 2Q17 revenue of RM101.2m, bringing 1H17 revenue to RM170.8m (-12.8% yoy) due to lack in spillover works from prior year as compared to 2016. Cumulative 1H17 earnings swung from a RM0.7m loss to a profit RM4.9m, supported by lower interest expenses and higher associate contribution as a result of higher oil prices.

QoQ – Higher Revenue, But Core Earnings Narrowed

Sequentially, 2Q17 revenue rose 45.4% to RM101.2m on higher work activities which also resulted in better overall vessels utilisation. Gross loss narrowed from RM5.6m to RM2m. However, operating losses widened from RM7.9m in 1Q17 to RM12.4m due to a one-off claim recognised for a job completed. As a result, core net profit declined from RM4.7m to a mere RM0.2m. Kapal, Banam and Meranti (KBM) associate profit fell 3% qoq to RM14.7m.

Revising Our Earnings Forecast

We now expect PENB to register a RM9m loss in 2017E as compared to a RM23.6m profit previously on the back of a higher cost base moving into 2H17. We cut our 2018-19E earnings estimate by 27–30%, respectively as we lower our margin assumption.

Tactical Downgrade Until Clearer Turnaround Indication

Our SOTP-derived TP is lowered to RM1.03 (previous TP: RM1.55) post earnings downgrade and as we roll forward to 2018E. In view of the challenging O&G services business, we also downgrade our EV/EBITDA multiple from 8x to 5x, slightly under -1SD its forward 5-years mean. We downgrade the stock to a HOLD ahead of a weaker 2H17. Key upside risks include higher work orders, award of MCM contract, and higher oil prices. Downside risks include decline in oil prices leading to lower RSC contribution and delay in existing HuC work orders.

Source: Affin Hwang Research - 28 Aug 2017