Period  4Q14/FY14

Actual vs. Expectations  FY14 core net profit (CNP) of RM37.4m came in above expectations, accounting for 126% and 146% of our and consensus’ estimates, respectively. The significant positive variance was mainly due to: (i) stronger-thanexpected billings, and (ii) higher-than-expected margins. The group also secured new contracts worth RM1.1b in FY14 vs our assumption of RM1.0b.

Dividends  Below expectation. The group declared 1.25 sen DPS which was lower than our forecast of 4.0 sen.

Key Results Highlights  QoQ, 4Q14 CNP jumped more than four folds to RM16.2m from RM2.9m in 3Q14. The stellar performance was mainly attributable to: (i) higher quantity and value of contracts being executed, hence higher billings, (ii) improvement in margins (net margin enhanced to 5% from 3%), and (iii) positive contribution from O&G-related contracts.

 YoY, both revenue and CNP rose by 29% and 74%, boosted by higher contributions from Middle-East projects and higher margins from Malaysia projects.

 However, YTD, FY14 CNP declined by 27% dragged down by weaker margins in the first three quarters of FY14 following higher operating costs in setting up its O&G segments: i.e. lifeboat construction, steel fabrication plant.

Outlook  Management updated that SENDAI’s outstanding orderbook currently stands at RM1.4b of which 75% of the orderbook came from Middle Eastern region while the remaining 14% and 11% are from Malaysia and India. The orderbook will last for the next two years.

 While we acknowledged the improvement of the group’s margins in this quarter, we prefer to see the group’s ability to sustain the earnings delivery in the upcoming quarters.

 In addition, we remain concerned on the fact that the O&G industry is facing challenging times now with the volatility in world’s oil prices.

Change to Forecasts  Maintain forecasts for now as we have already assumed the group to fetch higher margins (i.e. FY15E net margin of 5% vs. 4% in FY14) in FY15E. We also introduced our FY16E CNP forecast of RM60.7m, representing 11% growth. Our forecasts are based on the assumption of the group replenishing RM1.0b and RM1.5b worth of new orders in FY15E and FY16E.

Rating Maintain UNDERPERFORM

Valuation  Despite the vast earnings improvement this quarter, we prefer to see more consistent earnings delivery in coming quarters before we review our CALL/TPs.

 Hence, we reiterate our UNDERPERFORM call with unchanged TP of RM0.60 based on FY15 PER of 8.5x.

 Our applied PER is at the lower-end of the small-cap construction peers’ PER range of 8x-10x.

Risks to Our Call  Higher-than-expected margins.

 Higher-than-expected orderbook progress.

 Higher-than-expected new contracts 

Source: Kenanga