PENB went into the red in 3Q17, recording a net loss of RM7.9m. This did not come as a surprise to us but missed the consensus estimate. No dividend was declared for this quarter vs. 3Q16’s DPS of 3sen. Although the share price has corrected by >20% in the month to date, we foresee more downside risk as investors anticipate a weaker quarter ahead. We maintain our Sell call and lower our 12-month SOTP-based TP lower to RM0.70 (from RM0.90).

At Least Another Loss-making Quarter

PENB’s 3Q17 revenue came in at RM171m (+69% qoq, +124% yoy), bringing cumulative 9M17 to RM341.8m. The main reason for the revenue increase was the hook-up commissioning and topside maintenance jobs executed for Petronas Carigali. Excluding the RM11.3m land sale gain, RM0.3m unrealised forex gain and RM4.8m impairment loss on trade and other receivables, headline loss of RM7.9m widens to RM14.7m, wiping out the gain made in 1H17. The higher operating losses incurred in 3Q are expected to persist throughout 4Q.

3Q Falls Into the Red

Sequentially, 3Q17 revenue rose 69% to RM171m on higher work activities which also resulted in better overall vessel utilisation. Notwithstanding this, operating losses widened from RM2m to RM16.7m due to higher incurred operating costs. Associate profit fell 34.7% qoq to RM9.6m as the KBM cluster underwent some operational management during the quarter.

Maintain SELL

We expect PENB to remain loss-making in 4Q on high operating costs, and foresee its services and marine assets segment (OES) being a drag to overall earnings in FY18. As such, we lower our EV/EBITDA multiple to 5.5x (from 8x) to value its OES business, which implies a 30% discount to its local peers. With the uncertainty at this juncture, we lower our target price to RM0.70 (from RM0.90) and maintain our SELL rating. Key upside risks include higher work orders, higher oil prices and most importantly an improvement in operating margins.

Source: Affin Hwang Research - 21 Nov 2017