SENDAI’s 1H16 CNP of RM39.0m was above expectations accounting for 76% and 63% of our and consensus estimates respectively. The positive deviation was mainly due to higher-than-expected margins from their Middle Eastern Division. No dividends declared as expected. Upgrade FY16 earnings by 17% after factoring for higher margins assumptions for Middle Eastern Division while keeping FY17E earnings unchanged. Post-adjustment, maintain OP with unchanged TP of RM0.70 based on unchanged 10.0x FY17 PER.

Above expectations. SENDAI’s 1H16 CNP of RM39.0m come in above our and consensus expectations, accounting for 76% and 63% of estimates, respectively. The positive deviation was mainly due to higher-than-expected margins from their Middle Eastern Division. We derive our CNP after reversing out: (i) unrealized forex losses of RM8.9m, and (ii) fair value losses from 29.9% owned TOGL amounting to RM101.7m (fully impaired). No dividends declared as expected.

Results highlight. 1H16 CNP of RM39.0m increased 57% YoY underpinned by: (i) higher revenue of 4% stemming from higher billings in Middle East (+19%) on the back of improved PBT margins (+3.8ppt) due to better margins mixed jobs, and (ii) Indian operations registering a PBT of RM6.5m vis-à-vis a loss of RM1.3m in 1H15. 2Q16 CNP of RM16.1m was down 30% QoQ due to: (i) higher financing cost (+19%), (ii) lower EBIT margins of 0.7ppt on the back of Oil and Gas Division suffering RM0.1m loss vis-à-vis profits of RM3.9m on PBT level, and (iii) compression in Indian operations PBT margins (-11.8ppt) stemming from delayed works in Worli Development Project.

Outstanding order book. The latest update we have in regard to YTD wins and outstanding order book was in May 2016 which stood at RM753m and RM2.2b, respectively. We are awaiting an analyst’s briefing next Monday (5/9/2016) for updates on contract wins and outstanding order book.

Outlook. While we foresee SENDAI’s India division to continue experiencing volatility in margins and losses till mid-FY17 stemming from their RM268m Worli Development project, which is currently placed on hold, the Middle Eastern Division has shown improvement from better margin jobs at hand. Nonetheless, we note that earnings sustainability might be a concern considering historical volatile margins in FY14-FY15. Meanwhile, we note that SENDAI will no longer be bogged down by fair value losses from their 29.0% TOGL (Technics Oil and Gas) stake which they have fully impaired.

Earnings adjustment. Post results, we upgrade FY16E earnings by 17% on the back of higher margin assumptions for Middle East while maintaining FY17E earnings unchanged as we remain cautious on the margin sustainability. We note that our FY16E earnings are on the conservative side in view of possible losses from SENDAI’s India division.

Maintain OP with unchanged TP of RM0.70. Post adjustments to earnings, we maintain our OUTPERFORM call with unchanged TP of RM0.70 based on 10.0x FY17 PER. We believe valuations are justifiable as it is in line with our targeted small mid cap PER range of 9-13x.

Source: Kenanga Research - 30 Aug 2016