PENB’s 4Q17 core net losses widened 47% qoq to RM21.6m. 2017 core net losses of RM31.4m came close to our full-year expectations. While 2017 revenue soared 39% yoy, earnings was impacted by high operating expenses in 2H, wiping out 1H profits. Nevertheless, we upgrade PENB to a HOLD as we believe the worst is over for the company with earnings looking to turnaround in 2018 as the operating expenses was more of a one-off cost overrun on certain project which has been completed. Maintain TP at RM0.70.

Improving Revenue, But Hit With High Operating Expenses

PENB booked in a headline loss of RM47m in 4Q17 (+493% qoq; -42% yoy). Stripping out the PPE impairments and one-off non operating expenses incurred at the service segment, core net losses narrowed 23% yoy to RM21.6m in 4Q. The full year loss was near our forecast, but ahead of consensus estimates, which had forecasted larger losses. Despite the stronger revenue (+39% yoy) in FY17, core losses only narrowed 13% yoy due to cost overrun on certain project in 2H17.

Wider Losses Qoq as Expected

Sequentially, core net losses widened 47% to RM21.6m in tandem with the lower revenue, which declined 29% due to lower work activities from Semarang EOR and Hook-Up Commissioning and Topside Major Maintenance (HUC/TMM) contract from Petronas Carigali. Operating margin also declined 13ppts as a result of the lower revenue. However, the saving grace as usual was from higher associate profits (30% stake in the Kapal, Banam, Meranti RSC), which rose 23.7% qoq to RM11.9m as it benefited from the higher oil prices..

Upgrade to HOLD; No Change to TP

We are leaving our existing EPS forecasts unchanged and introduce our 2020E earnings. We maintain our target price at RM0.70 (based on 5.5x EV/EBITDA multiple to value the OES business, and DCF on KBM RSC). We upgrade PENB to a HOLD call as we believe downside risks to earnings are limited. The high operating expenses seen in the 2H17 will likely not recur moving into 2018 as it was relating to a cost overrun on a certain project which has been completed.

Source: Affin Hwang Research - 26 Feb 2018