Period

1Q16

Actual vs. Expectations

Although core profit of RM4.2m only made up 7% of house and street’s full-year FY16 estimates, it is still within expectations as earnings are expected to pick up in the remaining quarters.

Dividends

No dividend was declared as expected.

Key Results Highlights

The reported 1Q16 net profit of RM20.5m included RM16.3m unrealised forex gain arising from the Alex Corp’s job in Cambodia. Note that the reported income tax of RM6.2m included an accrual taxation of RM4.6m on the unrealised gain. Stripping out the EI, 1Q16 core net profit would have declined 59% QoQ to RM4.2m from RM10.1m in 6Q15 as revenue plummeted by 46%. This was mainly attributable to project executions still at early stages, such as substations of Samajaya and Yong Peng East, while Alex Corp’s project was slow due to the raining season there.

Compared to the period of Jul-Sep 2014 (which is 3Q15), 1Q16 core earnings contracted 42% YoY from RM7.2m as revenue declined 30% over the year. The decline in earnings was mainly due to project executions still at the early stages as mentioned above.

Outlook

Earnings are expected to pick up for the remaining quarters of FY16 given that Cambodia is now in the dry season; therefore, Alex Corp’s job can now go full-swing while projects for NUR and substations of Mambong and Entinggan are approaching final stages when higher contract values are recognised.

We understand that it is looking to secure two major projects worth a total of c.RM700m in FY16; this could almost double its current order-book of RM856m as at 30 Sep with tender book of RM1.34b.

Change to Forecasts

No changes to our FY16E-FY17E numbers.

Rating

Maintain OUTPERFORM

Valuation

Although share price has almost doubled YTD with high CY16 PER of 18.4x vs. the power utility sector average of 14.1x, we still believe the valuation is justifiable given its explosive earnings growth story.

With a higher moving 3-year mean of 12.8x from 10.5x, the benchmark +1.5 SD 3-year mean has raised targeted CY16 PER to 19.1x from 16.6x for the existing project and product businesses valuation.

Thus, its new price target is now upgraded to RM7.43/SoP share from RM6.49/SoP, which includes FCFF valuation for the Cambodia BOT at 7.2% discount rate.

Risks to Our Call

Failure to replenish orderbook.

Cost over-runs.

Source: Kenanga Research - 27 Nov 2015