1Q16 CNP of RM22.9m makes up 44% and 36% of our and consensus estimates, respectively. However we deem it as broadly inline as we expect weaker quarters ahead, dragged down by its operations in India. No dividends declared as expected. No changes to our earnings estimate. Upgrade to OUTPERFORM in light of the sharp fall in share prices with a lower TP of RM0.70 (previously, MP, TP: RM0.73) rolled forward to FY17E with a lower 10.0x PER (-1.0SD 5 year average) from 11.0x previously, due to earnings risk from India.

Broadly Within. 1Q16 CNP of RM22.9m seemingly beat expectations, accounting for 44% and 36% of our and consensus full-year estimates, respectively. We deem the 1Q16 performance to be broadly within expectation as we anticipated weaker quarters ahead dragged down by the potential losses from their Indian Worli Development project coupled with their new associated TOGL (Technics Oil and Gas Limited) which is currently barely profitable. Our CNP of RM22.9m is derived after reversing out (i) unrealized forex losses of RM10.7m and (ii) fair value losses from 29.9% owned TOGL which closed 19.2 sen on 31/3/15 from the previous marked to market price of 62.0 sen amounting to a loss of RM62.6m. Note that we had anticipated this fair value loss from TOGL since our last company update (4/3/16). No dividends declared as expected.

Results Highlight. CNP was up 9% YoY underpinned by 9% increase in revenue from higher billings in their Middle east (+58%) and Oil and gas (+95%) segment. Despite the 10% dip in revenue, CNP increased 35% QoQ on the back of improved EBITDA margins by +1.1ppt mainly from their Indian operations registering a PBT of RM6.0m vis-à-vis a loss of RM7.8m in 4Q15. This is due to advanced billings from their RM269m Dhirubai Ambani Convention Centre project, which has better than average margins and its completion is expected by 2Q16.

Orderbook. SENDAI currently has RM2.2b outstanding orderbook providing earnings visibility of 1-1.5 years. YTD contracts secured stood at RM706m representing 35% of our RM2.0b replenishment target with a remainder of RM1.3b to be achieved.

Challenging mid-term prospects. In India, although SENDAI had registered a profit in the current quarter, we expect them to continue experiencing challenging margins and losses stemming from their RM268m Worli Development project which is currently on hold. As of April-16, TOGL which was previously a financial asset has become an associate company of SENDAI. After consecutive losses in FY13 and FY14, TOGL is barely profitable in FY15 registering a profit of RM3m. Furthermore, TOGL is exposed to additional impairment of c.RM20.0m based on yesterday’s closing price of SGD 0.07. Hence, we remain cautious with TOGL’s prospect going forward. On a brighter side, we note that billings from SENDAI’s Middle East and Oil and gas operations is starting to stabilize providing sustainable source of earnings going forward.

Valuations. We make no changes to our earnings estimates. However, we upgrade our call to OUTPERFORM (from MP) in light of the fall in share prices with a lower TP of RM0.70 (previously RM0.73) after rolling forward valuation base year to FY17 based on -1.0SD 5 year Fwd. PER of 10.0x (previously 11x). We feel the cut in valuations are justifiable as: (i) SENDAI is incurring losses within their Indian Worli Development and faces margin compression in several other projects leading to inconsistent earnings within Indian operations and (ii) the bleak prospects ahead for their new associated TOGL.

Source: Kenanga Research - 31 May 2016