We attended SENDAI’s briefing and came away feeling NEUTRAL on its outlook. Highlights from the briefing were: (i) RM1.53b secured in 8M16 with RM20.0b worth of tender book, (ii) fully impaired TOGL, (iii) updates on India’s Worli Mixed Development issues, and (iv) prospect moving forward. Make no changes to FY16-17 earnings estimates. Post briefing, maintain OUTPERFORM with a lower TP of RM0.63 (from RM0.70) based on lower FY17E PER of 9.0x (previously 10.0x).

Secured RM1.53b of contracts for 8M16. As of 31st August 2016, SENDAI has secured RM1.53b worth of contracts inline with our expectations; accounting for 77% of our FY16E targeted RM2.0b replenishment. We believe our replenishment target is highly achievable underpinned by RM20.0b worth of tenderbook (Structural steel and construction: RM9.0b; Oil and Gas: RM11.0b). YTD, outstanding orderbook stood at RM2.5b providing earnings visibility for the next 1.5 years. (Refer overleaf.)

No more negative surprises. Management reiterated that their RM130m investment in Technics Oil and Gas Limited (TOGL) has been fully impaired and will no longer suffer fair value losses moving forward. To recap, SENDAI has impaired a cumulative amount of RM101.7m in 1H16 for TOGL due to the slump in share price and is currently placed under judicial management. We are positive on this, as we believe the full impairment on TOGL would enable SENDAI to move on and focus on their core businesses.

Worli Mixed Development updates. We understand that SENDAI’s RM246m Worli Mixed Development project is partially placed on hold as the clients are in the midst of obtaining approval to have the building built taller. Hence, SENDAI has been incurring idle costs while provisioning for VO claims, which bog down its construction margins in India. However, management remains hopeful that this on-going issue to be resolved by 1H17.

Prospects moving ahead. While Middle East margins has shown improvement (1H16 PBT margins of 8.2% vis-à-vis 4.4% in 1H15) underpinned by the new contracts secured at a GP margin level of 13- 15%, we remain concerned on margins sustainability considering SENDAI had displayed volatile margins in FY14-15 despite securing jobs with good margins then. For FY17, management expects to have their two lift boats (valued at USD180m) delivered which could potentially reduce their current net gearing level of 0.67x (as of 2Q16) to 0.40x due to its payment structure of 20% down payment and remaining 80% upon completion. Nonetheless, we keep our gearing levels unchanged for now due to potential payment risks. (Refer overleaf)

No changes to earnings. We keep our conservative earnings estimates unchanged as we maintain our FY16E replenishment target of RM2.0b.

Maintain OUTPERFORM with lower TP of RM0.63. Post briefing, we revise our valuations lower to 9.0x FY17E PER (from RM0.70 based on 10.0x FY17E PER) which is inline with the valuation ascribed to its midcap peers i.e. KIMLUN as we rebased our valuation methodology for SENDAI and we are keeping an OUTPERFORM call on SENDAI premised on its improving outlook without more negative surprises coupled with its current weak share price.

Source: Kenanga Research - 6 Sep 2016