Period  3Q14/9M14

Actual vs. Expectations Eversendai’s 9M14 net profit of RM21.2m came in below expectations, accounting for 63% and 48% of our and consensus’ estimates, respectively. The negative variance was mainly due to: (i) continued losses in India’s operations, and (ii) lower-than-expected margins arising from higher operating costs for new development of O&G businesses.

Dividends  None as expected.

Key Results Highlights QoQ, 3Q14 revenue was up by 8% driven by orderbook progress. Nonetheless, net profit was down by 60% dragged down by higher costs incurred on preparation for the execution of newly secured contracts.

 YoY, while3Q14 revenue was flat (+2%) due to slower billings in Middle East and India, net profit rose significantly by 112%, due to the low base effect in 3Q13. Recall, in 3Q13, the group revised downwards the budgeted profits of some contracts in India and Qatar in view of un-finalised variation claims.

 YTD, 9M14revenue and net profit declined by 4% and 49%, respectively, due to lower margins following higher operating costs in developing its O&G segments: i.e. lifeboat construction, steel fabrication and plant construction segments.

Outlook  Eversendai updated that its orderbook currently stands at RM1.6b and a bulk of it coming from Middle East.

 Despite the group’s huge orderbook, we are now turning cautious on the group’s earnings outlook after seeing few rounds of earnings disappointment. In addition, we are also concerned on the fact that O&G industry is facing challenging times now with the volatility in world’s oil prices.

Change to Forecasts We revise lower our FY14-FY15 earnings forecasts by 12%-46% after we adjusted our FY14-FY15 gross margins assumptions to 10.7%-15% from 11%-19% previously.

Rating Downgrade to UNDERPERFORM

 Despite its growing orderbook, we are now more concerned on the group’s earnings disappointment. This could persist in the next quarters. Including this quarter, the group continuously missed our previous five earnings expectations already. Hence, after considering the stock’s risk-reward ratio, we decided to downgrade our recommendation to UNDERPERFORM from OUTPERFORM. The stock will need to demonstrate more consistent earnings delivery before we review our CALL/TPs.

Valuation  Post-earnings revision and based on unchanged FY15 PER of 8.5x, we revised lower our TP to RM0.60 (from

RM1.11 previously). Our applied PER is within the small-cap construction peers’ PER range of 8x-10x.

Risks to Our Call   Higher-than-expected margins.

 Higher-than-expected orderbook progress.

Source: Kenanga