Period

3Q15/9M15

Actual vs. Expectations

3Q15 results came below expectations with an unexpected net loss of RM24.8m, reducing its 9M15 core net profit to RM25.8m which make up 24.3% and 21.2% of our in-house and street’s full-year estimates, respectively.

The negative deviation was mainly due to an additional cost provision for Malikai TLP resulting in an operating loss in offshore segment.

Dividends

No dividend was declared as expected. Key

Results

Highlights

3Q15 results sank into net loss of RM24.8m from net profit of RM27.9m in the preceding quarter due to lower project billing as some projects such as SK316 Central Processing Platform project was completed. An additional provision for cost was also made for its Malikai TLP project thereby nudging the offshore segment into an operating loss of RM28.2m from an operating profit of RM1.5m in the previous corresponding period. Despite the weakness in fabrication segment, the weaker set of results was partially cushioned by stronger revenue and profit contribution from the Marine division due to higher value of vessels repaired from Rigs and FSU vessel categories.

YoY, the group has also fallen into the red from a net profit of RM19.2m due to a 40% fall in Offshore revenue while the additional cost provision continued to crimp its bottomline. On the flipside, Marine segment showed YoY improvement by tripling its revenue and improving operating margins to 17.4% in 3Q15 vs. 6.1% in 3Q14 as a result of more favourable vessel mix.

YTD, 9M15 core net profit plummeted by 71% to RM25.80m from RM89.2m in 9M14, predominantly attributable to higher cost incurred due to variation orders as well as depleting orderbook in Offshore segment. On the other hand, marine segment continued to post improvement for three consecutive quarters, tripling its operating profit to RM51.3m from RM16.9m in FY14, thanks to increase in jobs and higher value vessel repaired, which fetched better margins.

Outlook

Current order book stands at RM955.0m vs. RM1.5b as at Dec 2014 after the inclusion of new contracts secured, spanning up to 2017.

Tenderbook of the group dropped to RM4b from its previous guidance of RM7b, of which RM1.8b is from ongoing bid for several RAPID packages and the remaining from local and overseas bids.

We believe the fall in tenderbook is due to the exclusion of EPCC contract for the Kasawari gas project which was originally scheduled to be awarded in Feb 2015 but had been delayed. Being one of the three shortlisted players, this job is supposed to provide a huge boost to the group’s dwindling orderbook.

The huge reduction in tenderbook further exerts pressure on its contract replenishment and yard utilisation. Going forward, we foresee its already low fabrication job margins to pare down further in the midst of a more challenging O&G industry.

Marine repair segment is anticipated to be relatively resilient compared to the Offshore division as the company is focusing on higher value job to accommodate demand for dry docking repair and maintenance for rigs and storage tankers.

Change to Forecasts

We cut our FY15/16E earnings forecast by 67.6%/44.5%, respectively, to RM34.4m and RM73.9m as we tweaked our overall fabrication margins to 2% from 3% previously for new contracts on the back of weaker fabrication market overall and uncertainty in costing for certain projects due to unpredictability in project requirements. Furthermore, we also imputed negative margins for certain projects such as Malikai to factor in the additional cost provision.

Rating

Maintain UNDER PERFORM

Valuation

Our TP is maintained at RM1.00 as we have decided to switch our valuation methodology to 0.6x CY16 PBV in view of the underlying high earnings uncertainty in the near-term. The low earnings visibility has rendered PER methodology less relevant in our view. The assigned target PBV is also consistent with its -1.5SD below to its 5- year average Fwd PBV. We believe the lower end valuation, as per the Fwd. PBV band, should be sufficient to factor risk of its orderbook replenishment.

Risks to Our Call

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

Source: Kenanga Research - 4 Nov 2015