Period

2Q15/1H15

Actual vs. Expectations

1H15 core net profit of RM54.1m came below expectations, accounting for 38.9% and 41.4% of our full-year FY15 estimates and that of market consensus, respectively. The lower-than-expected earnings were due to lower-than-expected fabrication margins achieved possibly due to project complexity.

Dividends

No dividend was declared as expected.

Key Results Highlights

Core net profit in 2Q15 slumped 49.1% YoY to RM18m from RM35.4m due to lower project billing as most of its newly secured projects are still at the early stage. Additional provision for cost was also made for its Malikai TLP project thereby resulting in lower fabrication (Offshore) margins in the quarter. Offshore margin in 2Q15 is only 0.3% compared to 1.2% in 2Q14. This is being partially offset by stronger revenue and profit contribution from the Marine division due to higher value of vessels repaired especially from Rigs and FSU vessel categories which results in higher profitability.

Similarly, the group’s core net profit plunged by 50% QoQ due to lower Offshore revenue despite similar operating margins were achieved QoQ, due to lower project billings as most of the projects are already completed coupled with new contracts secured still in early work stages. Marine segment showed QoQ improvement with higher revenue and better margins achieved due to more favourable vessel mix.

In 1H15, core net profit declined by 22.8% to RM54.1m from RM70.1m in FY14, predominantly attributable to weaker Offshore revenue and operating margins caused by slower work billings and additional costs incurred for its projects due to variation orders. Marine division, however, posted increases in both top line and operating margins due to higher value vessel repaired which fetched better margins.

Outlook

Current order book stands at RM1.0b after inclusion of the new contracts secured, spanning up to 2017.

Profit contribution for most of the OBU projects is guided to emerge only by 2H15 and 2016.

Tenderbook of the group now stands at RM7b with c.RM4b comprising of oversea jobs, RM1b from RAPID and the remaining from local market. The group is looking at onshore fabrication segment to diversifying its exposure in the offshore segment targeting subcontract module and substructure works.

We foresee pressures on its already low fabrication job margins as oil majors seeks to cut costs in the midst of a more challenging O&G industry.

EPCC contract award for the Kasawari gas project which was originally scheduled to be awarded in Feb 2015 has been delayed to next year. Being one of the three shortlisted players, this job is expected to provide a huge boost to the group’s dwindling orderbook.

For the Marine repair segment, we anticipate it to be stronger compared to the Offshore division as the demand for dry docking repair and maintenance is expected to be more resilient coupled with potentially stronger demand from MISC for its newly acquired LNG vessels to be delivered in 2016-2017.

Change to Forecasts

We cut our FY15 earnings forecast by 23.7% to RM106.2m as we tweaked our fabrication margins to 3% from 6% previously on the back of weaker fabrication market overall and uncertainty in costing for certain projects due to unpredictability in project requirements.

FY16 NP is maintained as we anticipate higher contribution from its recently secured fabrication contracts next year.

Rating

Maintain UNDERPERFORM

Valuation

Our TP is maintained at RM1.00 based on unchanged 12.0x CY16 PER, which is in-line with big caps’ PER range at current oil price environment.

Risks to Our Call

(i) higher-than-expected project wins, (ii) better-than expected margins, and (iii) acceleration in project executions.

Source: Kenanga Research - 29 Jul 2015