Period

3Q15/9M15

Actual vs. Expectations

9M15 core net profit (CNP) of RM30.6m came in below expectations, accounting for 48% and 47% of our and consensus’s expectations, respectively. The CNP is derived after excluding: (i) net loss on financial assets at fair value of RM4.6m, and (ii) unrealised forex gain of RM13.5m.

The negative variance was due to: (i) compression in operating margin, whereby its EBITDA margins decreased by 1.4ppt to 7.7% due to higher-than-expected operation costs, and (ii) higher effective tax rate (+3.8ppt to 9.7%).

Dividends

None as expected.

Key Results Highlights

QoQ, 3Q15 CNP jumped 47% to RM5.7m, inline with the growth in revenue, which rose by 11% to RM471.5m. That said, the substantial increase in profit was also driven by other factors i.e. (i) higher PBT margin from Middle East projects (+2ppt to 5%), and (ii) lower losses from India, as labour overheads are moved to other projects in India. To recap, 2Q15 CNP was mainly dragged down by cost overruns related to a project in India, which was partially on hold while seeking for clearance from the local authority.

YoY, 9M15 CNP surged 2x to RM30.6m, underpinned by a strong revenue growth of 87%, mainly attributable to higher contract value of contract executions being recognised from Oil & Gas division (significant jump of 37x to RM293.1m).

Outlook

Despite the disappointment in earnings, SENDAI has delivered its promise to secure superior orderbook growth (+36.4%) from year 2014. Moving forward, SENDAI is still eyeing for more jobs both overseas and locally given its massive tenderbook size of RM25.0b of which the bulk is from the Middle East. On the local front, we believe that SENDAI will benefit from newsflow such as RAPID and KL118 jobs.

YTD, the group has secured RM1.5b new contracts, which has met our full-year new contracts assumption of RM1.5b. Its outstanding orderbook currently stands at c.RM1.8b providing earnings visibility to the group for at least the next two (2) years.

Change to Forecasts

In view of stiffer competition on margins, especially from Middle East region, we lowered our FY15-16E earnings by 31.5-7.1% after trimming our gross profit margin estimates lower by 1ppt to 13-15%.

Rating

Maintain OUTPERFORM

Valuation

Post earnings revision, we lowered our TP to RM0.92 (RM0.99 previously), based on an unchanged ascribed PER of 11x. The target PER of 11x is in line with our target smallmid caps’ PER range of 9x-13x.

We are keeping our OUTPERFORM call as we expect SENDAI to maintain its higher earnings base from FY15 onwards given the recovery in orderbook compared to the previous year. That said, we also like the fact that the group has increased its exposure in oil and gas infrastructures which further diversified the group’s earnings profile. Currently, the contribution from its oil and gas division makes up 40% of its 9M15 pre-tax profits, with an average pre-tax margin of 8%, much higher compared to their construction pre-tax margin which averaged 4.0%.

Risks to Our Call

Lower-than-expected margins.

Lower-than-expected orderbook progress.

Lower-than-expected new contracts.

Forex fluctuation risks.

Source: Kenanga Research - 1 Dec 2015