Period

4Q15/FY15

Actual vs. Expectations

The 4Q15 results came within our expectation as the core net earnings of RM9.1m brought FY15 core net profit (NP) to RM43.7m which was only 5% below estimate. However, the results were 23% below market consensus in which we believe the market might have overestimated demand for pipes and fittings from the O&G industry despite the low crude oil prices environment.

Dividends

A 4th interim NDPS of 0.5 sen was declared in 4Q15, totalling FY15 NDPS to 3.1 sen vs. our estimate of 3.3 sen.

Key Results Highlights

In 4Q15, core net profit declined 15.4% QoQ from RM9.1m to RM7.7m due to higher operating expenses recognised in the quarter and lower trading division’s operating margin caused by tighter competition despite 8.5% QoQ growth in trading revenue. Manufacturing revenue, on the other hand, was flattish QoQ with EBIT margins almost similar for both quarters.

Core net profit in 4Q15 plunged 47.4% YoY underpinned by weaker revenue and margins in the trading division mainly due to weaker demand following the plunge in oil prices. This was partially offset by stronger YoY revenue contributions from the manufacturing division (16.9%), driven by stronger demand in local manufacturing sector.

In FY15, net profit fell by 21.6% to RM43.7m from RM55.8m in FY14, largely due to: (i) a dip in trading division’s margins caused by stronger price competition (down 1.4 ppt YoY to 10.2%) amid the low oil price environment while revenue of the division fell 3.8% for the same period, and (ii) a 14.1% topline contraction in the manufacturing division driven by weaker stainless steel exports post US anti-dumping of import policy implementation and weaker European market.

Outlook

While the RAPID project is expected to contribute positively to the group in the coming years, we believe the near-term outlook could be sluggish due to the challenging oil and gas industry amid uncertainty in crude oil prices.

On the positive side, the group is understood to have received its first order of pipes and fittings for the RAPID project. Its trading revenue is believed to have picked up pace as the bulk of earlier works, which were mainly earthworks have been completed. Going forward, demand for pipes and fittings should pick up as more construction activities that involve piping takes place in RAPID.

Meanwhile, the export market for the manufacturing division is expected to be challenging in the near-term as Europe struggles with tepid GDP growth coupled with the loss of some US export sales due to anti-dumping policies previously. We believe the local manufacturing division will continue its strong growth providing earnings buffer for the manufacturing division as a whole.

Change to Forecasts

Our FY16E core NP is reduced by 6.9% as we adjusted our EBIT margin assumption downwards to 12% from 14% for the trading division in view of stronger price competition in the market and weaker demand. We also introduced our FY17E core NP of RM56.9m premised on: (i) RM360m trading revenue with 12.0% EBIT margin, and (ii) RM232m manufacturing revenue with similar capacity utilisation of 80%.

Rating

Maintain UNDERPERFORM

Valuation

We roll over our valuation base-year to CY16, with unchanged targeted PER of 9x. Our new target price is now RM0.74/share from RM0.72/share previously.

Risks to Our Call

(i) Faster than expected recovery in the trading division.

(ii) Stronger than expected growth in manufacturing exports.

Source: Kenanga Research - 27 Apr 2015