Period     1Q13/3MFY13

Actual vs. Expectations    The 1Q13 net profit of RM31.1m was largely within ours and the consensus expectations, accounting for 23.0% and 23.1% of ours (RM135.4m) and the market (RM134.8m) full-year estimates.

We view the results as within expectations as we believe the earnings should strengthen further in the later quarters as shipbuilding division margins pick up.  

Dividends    No dividend was announced as expected.

Key Results Highlights   QoQ, the net profit rose 9.6% mainly due to (1) the higher operating margins from the shipbuilding division, which we suspect to be due to the delivery of higher-spec vessels; and (2) a turnaround in its vessel chartering division from the greater bareboat charter income earned as well as lower administrative expenses. In 4Q12, this division only broke-even. 

YoY, the revenue was down (-27.5%) due to the lower vessel deliveries (4 units vs. 7 units in 1Q12). However, the higher PBT margins for both the shipbuilding and vessel chartering segments and lower administrative expenses led to a slightly better bottom line (+1.1%).

Outlook    The group’s net profit margin has been guided to be around 15%-25% from FY12 onwards  versus 25%-35% previously due to the normalisation of market conditions for the shipbuilding industry in the region.

Given the narrower margins, management is actively looking out for opportunities to diversify its sources of earnings. It previously tried to enter the engineering & fabrication, FPSO and FSO segments but these have yet to take off. We note that it is also now contemplating the offshore drilling segment, in particular, as another avenue of recurring income.

Change to Forecasts    We are maintaining our earnings estimates at this juncture.

Rating  Maintain OUTPERFORM

Valuation     Our target price of RM2.90 is based on an unchanged 9.0x PER. The discount to its peers like Uzma (valued at 12.0x PER) is due to its lack of any game-changer catalysts.

The catalysts for its forward earnings and higher valuations would be if: 1) its current year-end order book rises significantly above that of last year and 2) there is a successful diversification of its business to other markets.

Risks    1) Continued sluggish orders and margin erosion and 2) the inability to gain new forms of business.

Source: Kenanga