Period

4Q16/FY16

Actual vs. Expectations

The FY16 results came in below expectations with core net earnings of RM38.0m short by 12% and 6% of our and market consensus’ full-year estimates, respectively. The deviation was mainly due to lowerthan- expected manufacturing division margin as a result of intense price competition.

Dividends

A 4th interim NDPS of 0.5 sen was declared in 4Q16 which is similar to 4Q15. This brought full-year dividend to 2.1 sen, which is within our expectation.

Key Results Highlights

4Q16 core net profit fell 33.3% QoQ to RM7.4m, no thanks to a 32.2% drop in revenue from trading segment as well as margin erosion (2.5% in 4Q16 vs. 11.6% in 3Q16), but this was partially offset by stronger contribution from the manufacturing segment.

4Q16 core earnings also slid 3.3% YoY largely attributable to lower manufacturing output as a result of weaker global demand. Overall, EBIT margin strengthened to 12.0% from 10.6% in 4Q15 helped by reversal of allowance for slow moving inventories amounting to RM1.3m despite operating margins from both segments deteriorated.

FY16 cumulative core net profit dropped 13.0% YoY from RM43.7m in FY15 mainly caused by margin compression arising from intense price competition (12.0% in FY16 compared to 13.2% previously) and 2.4% weaker revenue.

Outlook

Near-term outlook remains sluggish due to the challenging oil and gas industry amid uncertainties in Crude oil prices. To maintain the plants’ utilisation rate, we opine the company will take on more orders to manufacture lower-margin products. (Refer overleaf for more details.)

Change to Forecasts

We cut our FY17E earnings forecasts by 2.8% after adjusting for lower contribution from the trading segment.

FY18E NP of RM48.5m is introduced factoring: (i) 70% utilisation in carbon steel plant, (ii) 80% utilisation in stainless steel plant, and (iii) maiden earnings contribution from galvanising business.

Rating

Maintain MARKET PERFORM

Valuation

Post earnings adjustment, our TP is now increased to RM0.55 from RM0.53, pegged to an unchanged PER of 8x as we roll forward our valuation base year to CY17, which is also in line with small caps O&G’s down-cycle valuation.

Risk

(i) Weaker-than-expected performance of the trading division.

(ii) Lower-than-expected selling prices of pipe fittings & valves.

Source: Kenanga Research - 27 Apr 2016