Period

2Q15/1H15

Actual vs. Expectations

1H15 core net profit (CNP) of RM29.9m came in below expectations, accounting for 40% and 41% of our and consensus’s expectations, respectively. The CNP is derived after excluding net gains on financial assets at fair value of RM10.0m.

The negative variance was mainly attributable to cost overruns related to a project in India, which is partially on hold as it is seeking for clearance from local authority.

Dividends

None as expected.

Key Results Highlights

QoQ, 2Q15 CNP slump by 84% to RM4.1m, despite recording flattish revenue of RM425.2m, on the back of lower PBT margin from Malaysian projects (-8ppt to 0%) and Indian projects (-58ppt to 44%).

YoY, 1H15 CNP recorded a significant jump by 169% to RM29.9m, mainly attributable to higher contract value of contract executions being recognised. We believe this is mainly due to recognition of Middle Eastern projects, which recorded higher PBT of RM18.2m (+24%).

Outlook

Despite the slight disappointment in earnings, SENDAI has shown that it has delivered on its promise to turn around as seen in the massive improvement in earnings via margins expansion as well as superior orderbook growth.

We estimate SENDAI’s outstanding orderbook currently stands at about RM1.8b. Note that this will provide earnings visibility for the next two (2) years. Bulk of the orderbook came from the Middle Eastern region and the orderbook will last for the next two (2) years.

YTD, the group has secured RM1.1b new contracts, making up 74.2% of our full-year new contracts assumption of RM1.5b. We believe the contract target is achievable as we expect more contract flows in 2H15.

As for jobs prospects, currently SENDAI has ~RM10.0- 11.0b tender book, mostly from the Middle Eastern region.

Change to Forecasts

We lowered our FY15-16E earnings by 15-16% after trimming our gross profit margin estimates lower in order to take into account the Indian project which is partially on hold.

Rating

Maintain OUTPERFORM

Valuation

After adjusting for earnings revision, we revised lower our TP to RM0.99 (previously RM1.08), based on an unchanged ascribed PER of 11.0x. The target PER of 11.0x is in line with our target small-mid caps’ PER range of 10x-14x.

We believe SENDAI deserves such valuations as we expect SENDAI to maintain its higher earnings base from FY15 onwards given the recovery in orderbook and normalization of margins compared to the previous year.

Risks to Our Call

Lower-than-expected margins

Lower-than-expected orderbook progress

Lower-than-expected new contracts

Forex fluctuation risks

Source: Kenanga Research - 25 Aug 2015