Period

2Q16/1H16

1H16 core net profit of RM127.5m came in below expectations, making up 40%/43% of house/street’s FY16 estimates.

The variation was mainly due to lower sales of specialist products and services and weaker upstream segment contribution.

Dividends

No dividend was declared as expected.

2Q16 core profit leapt 57.3% QoQ from RM50.3m to RM77.3m underpinned by a 19.4% increase in topline, and bolstered by a 24% hike in contribution from JV and associates. We believe the stronger earnings were also due to seasonality.

YoY, core net profit jumped 37.1% from RM56.4m in 2Q15 thanks to stronger contribution from Phase 1 of the Pengerang Deepwater Terminal arising from cost normalisation and better utilisation as well as higher revenue from on-going fabrication projects such as Phase 2 of Pengerang Deepwater Terminal, MLNG Train 9, Toyo Bullet Tanks and SAMUR piping works.

1H15 cumulative core net profit strengthened by 20.0% YoY from RM106.3m due to the abovementioned reasons. However, it was partially dragged by its slower upstream activities and local specialist products and services division.

Outlook

Overall, we believe the group is on track to build on its long-term recurring income generating asset base with multiple tank terminals put in place to capitalize on the potential growth in Malaysia’s downstream sector in RAPID. (Refer overleaf)

We revised FY16 and FY17 forecasts downwards by 6.2% and 5.6%, respectively, after factoring in: (i) 20% decline assumptions in FY16 from only 10% previously for its specialist products & services, and (ii) weaker contribution from its upstream assets.

Rating

Maintain MARKET PERFORM

Valuation

Target Price is reduced to RM1.65 from RM1.71

Risks

(i) Delay in its in-house EPCC jobs and projects.

(ii) New capex intensive projects which drain cash flows.