Period  2Q14/1H14

Actual vs. Expectations Eversendai’s 1H14 net profit of RM18.3m came in below expectations, accounting for only 21% and 24% of our full-year forecast and consensus, respectively. Even though we expect a better 2H14, revenue and margin expansion expanded at rates below our expectations due to: (i) lower-than-expected construction billings for some projects, (ii) higher-than-expected operating costs which we believe were mainly due to higher overhead costs following the group’s setup of new fabrication yard in RAK Maritime City Zone.

Dividends  As expected they declared a first interim dividend of 1 sen, 50% of our estimate.

Key Results Highlights QoQ, 2Q14 revenue and net profit declined by 4% and 34%, respectively, mainly due to timing issues and higher operating costs. To recap, in 1H14 alone, the group has secured RM947m (56% of total orderbook) worth of new orders. Bulk of the orders came from the RM588m liftboat contract secured in 2Q14 (May 2014). As a result, we believe the group will incur higher costs following the early stage of the construction. At the same time, other projects were at the end of the completion stage, hence lower billings.

 YoY, 2Q14 net profit fell significantly by 58%, mainly due to slower rate of billings coupled with higher operating costs as mentioned above.

 YTD, due to slower QoQ performance aggravated by timing issues and higher costs, 1H14 net profit declined by 55%.

Outlook  Despite the earnings disappointment which we believe was only a “temporary glitch”, it is worth noting that for the first 9 months of FY14, Eversendai has secured RM1.1b worth of contracts, exceeding even the full year FY13 job wins of RM670m. It also exceeds our FY14 replenishment orderbook assumption of RM1.0b.

 In addition, we reaffirm our view that Eversendai’s sizeable O&G-related job, namely the RM588m liftboat contract that it secured in May 2014 could be a prelude of bigger things to come within this segment.

 Elsewhere, the group continued looking for more steel structural jobs in the Middle East, particularly in Qatar, Azerbaijan and Dubai.

Change to Forecasts  Lowering by 61% our FY14E earnings after adjusting downward the orderbook burn rate and margins assumption. Nonetheless, we maintain our FY15 earnings forecast of RM101.4m as we believe the group will recover strongly next FY driven by strong orderbook of RM1.7b largely contributed by high-margin projects such as the RM588m of liftboats contract.

Rating Maintain OUTPERFORM

Valuation  Lower TP to RM1.11 from RM1.18 based on 8.5x fwd-PER (from 9x previously) on FY15 EPS. We opt for a lower PER to account for the lackluster sentiment on the stock given the disappointing set of results. Nonetheless, our applied PER is within small-cap construction peers’ PER range of 8x-10x.

 Judging from the expected significant recovery of earnings next year driven by its sizeable orderbook, we believe current earnings disappointments are likely already priced in at current levels, implying limited downside risks. We also believe that market will eventually take note of their rapidly growing orderbook.

 However, if the group earnings disappoint our expectations the next quarter, we will not hesitate to downgrade our call.

Risks to Our Call  Lower-than-expected order book replenishment

 Lower-than-expected progress in construction projects

 Higher-than-expected input costs.

Source: Kenanga