We attended SENDAI’s Analysts’ Briefing yesterday and came away feeling POSITIVE on the group’s outlook moving forward despite the current gloomy market condition. Management reaffirmed that the group is now aiming: (i) for volume in terms of securing more jobs i.e. >RM1.6b in FY15, and (ii) to improve their profit margins gradually. We believe that the target RM1.6b is achievable, given that SENDAI’s YTD contract wins came in faster-than-expected, whereby the group’s new contracts secured (RM1.1b) made up to 74.2% of our full-year new contracts assumption of RM1.5b. Moreover, the group’s tenderbook currently stands at c.RM17.0b, of which c.40% are from the O&G division. Meanwhile, we believe the gradual improvement in margins is rather achievable, as c.40% of its orderbook is from O&G division that provides higher margins. Overall, we remain positive on the group’s prospects and reiterate our OUTPERFORM call with unchanged TP of RM0.99, based on

FY16 PER of 11.0x. 2Q15 results recap. Management recap that 2Q15 results performed weaker than 1Q15 mainly attributable to: (i) cost incurred related to a project in India, Worli mixed-use development (worth RM274m), which is partially on hold as it is seeking clearance from local authority, and (ii) acceleration in cost incurred to fast track the Tanjung Bin project (worth RM396m) which management deemed to be on track. Despite the additional costs that bogged down 1H15 core net profit (CNP), management is confident that the impact will not affect the upcoming quarter.

Expecting gradual improvement in margins. SENDAI is currently focusing on increasing the volume of business and improving profit margin via tighter cost controls, i.e. by enhancing productivity in order to pare down average cost of production. Although management does not expect double-digit margin improvement in the next two years, gradual improvement in margins is expected in subsequent quarters while a high single digit margin is expected for FY16. We believe this is achievable, given that c.18% of its RM1.1b orderbook is from the O&G division, i.e. RM662m liftboat contracts should bring in higher margins (expected >10% at EBITDA level).

Targeting to secure record high orderbook of over RM1.6b jobs in FY15, despite the current challenging O&G sector outlook. Management is aiming to surpass its all-time high orderbook of RM1.6b this year, as the group is looking at securing a few sizeable contracts. We believe that the target RM1.6b is achievable, given that SENDAI’s YTD contracts came in fasterthan- expected, whereby the group’s new contracts secured (RM1.1b) made up to 74.2% of our full-year new contracts assumption of RM1.5b. Moreover, management is unfazed by the gloomy O&G sector and currency volatility, as the group still expects to secure more contracts from Middle East clients. We understand that the group has a tenderbook as high of as over RM11.0b coming from the Middle East region.

Maintained our FY15-16E earnings forecasts. All in, we maintained our new job wins assumption at RM1.5b, as we have imputed the higher job wins assumption previously. Meanwhile, we maintained our net margin forecast of 5% for FY15-16E, as we concurred with management that net margin will improve gradually (1H15: 4%) but unlikely to record double-digit margin for the next two years.

Reiterate OUTPERFORM call with unchanged TP of RM0.99, based on unchanged ascribed PER of 11.0x. The target PER of 11.0x is in line with our target small-mid caps’ PER range of 7.0x-12.0x. Despite being valued at the higher range, 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 normalisation of margins compared to previous years. 

Source: Kenanga Research - 8 Sep 2015