9M16 CNP of RM42.9m is below our (71%) and consensus (62%) estimates mainly due to delays in commencement/progress of construction works leading to weaker-than-expected margins. No dividends declared as expected. Downgrade FY16-17E earnings by 16-5%. Maintain OP with a lower TP of RM0.60 (from RM0.63).

Below expectations. 9M16 CNP of RM42.9m accounted for 71% and 62% of our and consensus estimates which we deem below our expectation as we expect a weaker 4Q due to the delays in commencement/progress of construction works leading to weaker margins. We derived our CNP after reversing out: (i) unrealized forex losses of RM5.6m, and (ii) fair value losses from 29.9%-owned TOGL amounting to RM101.7m (fully impaired). No dividends declared as expected.

Results highlight. 9M16 CNP increased 40% YoY underpinned by: (i) higher billings (+8%) from Middle East division which improved its PBT margin (+3.5ppt) on the back of better margins mixed jobs, and (ii) Indian operations registering a PBT of RM9.8m vis-à-vis a loss of RM6.4m in 1H15.

3Q16 CNP of RM3.9m dipped 76% QoQ on the back of: (i) reduced revenue (-12%) as a result of delay in commencement/progression of structural steel jobs i.e. KL118, DLF IT Park, Tiara Tower, (ii) oil and gas division’s losses widened to RM6.7m (vis-à-vis loss of RM0.1m) due to slower billings (-30%), and (iii) higher depreciation costs (+15%).

Outlook. SENDAI has secured a record high win of RM1.8b jobs YTD, representing 90% of our FY16 replenishment target with a remainder of RM0.2b left to be achieved. We believe our target is highly achievable on the back of their RM20b tender book in hand. 9M16 outstanding order book of RM2.7b will provide earnings visibility for the next 1.5 years. For FY17, SENDAI’s two lift boats (valued at USD180m) which are expected for delivery could potentially reduce current net gearing level of 0.67x (as of 3Q16) 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.

FY16-17E earnings downgrades. Post results, we cut FY16-17E earnings by 16-5% to RM50.6-51.7m after factoring for lower margins assumptions within their structural steel segment on the back of the on-going delays which we expect to bog down FY16E and FY17E bottom lines.

Maintain OUTPERFORM with lower TP of RM0.60. Post adjustment to earnings, we maintain OP with lower TP of RM0.60 (previously RM0.63) based on FY17E applied PER of 9.0x. We believe our valuation methodology is justifiable as it is within our targeted small-to-mid cap peers’ range of 9-13x.

Source: Kenanga Research - 01 Dec 2016