We attended Eversendai (SENDAI)’s Analysts’ Briefing yesterday and came away feeling POSITIVE on the group’s outlook moving forward. Management reassured us that it has overcome all the issues, which surfaced in the last 2 years. Although double-digit net margin is no longer a target for the company, the group is now aiming: (i) for “volume game” – securing more jobs i.e. >RM1.6b in FY15, and (ii) to gradually improve their profit margins. As for RM1.6b new wins target, we believe it is rather achievable as SENDAI’s new YTD job wins (RM618m) pace has already came in faster-than-expected. Furthermore, the group’s tenderbook is currently at a substantial RM11.8b and the bulk coming from the Middle East. Meanwhile, as for its target to gradually improve margins, we believe it is achievable as: (i) at least 30-40% of its orderbook is from the O&G division which should fetch higher margins, (ii) some unclaimed VOs have already been collected, and (iii) there are no more start-up costs in O&G divisions. All in, we are now turning positive on the group’s earnings prospect as the group could actually turn around and improve its profitability. As such, we upgrade our rating to OUTPERFORM (from UNDERPERFORM) with higher TP of RM0.81 (based on FY15 PER of 10.0x) from RM0.60.

Previous issues resolved. The group reassured that they have overcome all the issues that dragged the group’s earnings in FY13 and FY14. This can be seen in its latest 4Q14 results whereby its core earnings came in above expectations driven by higher-thanexpected margins. To recap, the group’s earnings have disappointed in the last 7 consecutive quarters, dragged down largely by: (i) cost overruns in some projects in the Middle East due to super complex structure, which result in downward revision in margins, (ii) un-claimed VOs, and (iii) higher start-up costs in O&G division..

Targeting to gradually improve margins. SENDAI is now being conservative i.e. not expecting double-digit net margin anymore but expecting it to gradually improve in the foreseeable future. We believe it is achievable as: (i) at least 30-40% of its running orderbook of RM1.4b is from oil and gas division i.e. RM594m liftboat contracts which should fetch higher margins (>10% at EBITDA level), (ii) some unclaimed VOs have already been collected, and (iii) no more start-up costs in O&G divisions. For a start, we saw that in 4Q14, the group’s core net margin improved by 2 ppts QoQ to 5.3%.

Targeting to secure more than RM1.6b jobs in FY15 despite challenging O&G sector environment. The group is aiming to bag RM1.6b worth of jobs in FY15. We believe it is rather achievable to secure such amount of wins by looking at the pace of its jobs replenishment. So far in less than 3 months, SENDAI has achieved RM618m worth of jobs, making up 39% of its target. In addition, management mentioned that we should not worry over falling crude oil prices affecting SENDAI’s new jobs prospects as their Middle Eastern clients are committed to develop their infrastructures. For instance, the group just recently secured RM269m worth of infrastructure job in Qatar. Furthermore, the group still has a huge tenderbook of RM11.8b with the bulk coming from Middle East.

Future job prospects remain bright. Management shared with us that future job prospects remain bright underpinned by abundant opportunities in Middle East and Malaysia. (Refer Table 1).

Hiked by 15.3-14.8% FY15-16E earnings forecasts after the group’s promising outlook on the jobs replenishment. We are now forecasting higher new wins assumption of RM1.5b for FY15 from RM1.0b previously. Meanwhile, we maintain our net margin forecast of 5% in FY15 and FY16 as we concur with the management that margin may not improve significantly to FY12 level (11%).

Upgrade to OUTPERFORM from UNDERPERFORM with higher TP of RM0.81 from RM0.60. This is after: (i) earnings revisions, and (ii) higher ascribed valuation (from FY15E PER of 8.5x to 10.0x) benchmark. We believe SENDAI deserves higher valuation as we expect the group to move up to a new earnings base from FY15 onwards driven by its improved fundamentals (higher orderbook and margins). At FY15E PER of 10.0x, it is in line with small-cap peers’ fwd-PER range of 8.0-10.0x. Nonetheless, should the group disappoint in the coming reporting season (which we reckon is remote now), we will be looking to review our call. Risks to our call include: (i) lower-than-expected margins, and (ii) lower than-expected new job wins assumption. 

Source: Kenanga