Period  4Q13/FY13

Actual vs. Expectations Seremban Engineering’s (SEB)’s 4Q13 net profit of RM1.0m brought the FY13 net profit to RM6.3m.

 The FY13 net profit came in below our expectation, accounting for only 79.1% of our full-year estimate of RM7.9m.

Dividends  No dividend was announced.

Key Results Highlights QoQ, the 4Q13 revenue grew by 13.6% to RM30.1m compared to RM26.5m in 3Q13 due to higher sales recorded during the quarter as the international sales were higher by 62.7%. However, net profit dropped by 30.4% mainly due to higher cost of sales.

 YoY, the net profit declined by 28.6% despite the 29% increase in revenue mainly due to: (i) higher cost of sales, and (ii) higher provision for tax.

 The FY13 net profit of RM6.3m was down by 11.5% compared to FY12, also mainly due to (i) higher provision of tax as mentioned above; and (ii) higher operating cost.

Outlook  We are cautious on SEB’s earnings prospects as the market condition in the palm oil industry continues to remain challenging.

 SEB targets the commencement of its new fabrication operation facility in Lumut by 2014, which could be a further catalyst to FY14 earnings while increasing its exposure to the oil and gas sector.

Change to Forecasts We have downgraded our FY14 net profit by 33.3% to RM6.4m (from RM9.6m) as we assume lower revenue due to the challenging market condition in palm oil industry going forward. We also introduced our FY15E net profit of RM8.8m.

Rating We decided to remove this stock from our core coverage to retail coverage under the On Our Radar series, given the lack of institutional interest in the stock. Hence, it is now a NOT RATED stock (from OUTPERFORM previously).

Valuation  We have rolled-forward our target price base to CY15 for oil & gas stocks, as we believe that investors are now looking at longer-term visibility in picking oil and gas stocks. At an unchanged PER of 6.5x, SEB is now valued at RM0.72 from RM0.78 previously.

Risks to Our Call Better operating margins.

Source: Kenanga