FY16 Core Net Loss (CNL) of RM140.3m was below our, and consensus, expectations. The negative deviation stemmed from lower-than-expected margin due to higher costs arising from: (i) delays in Oil and Gas operations, (ii) impairments in Middle East and India operations, and (iii) provisions for doubtful debt worth RM64m. No dividends declared as expected. Downgrade FY17E earnings by 33% and introduce FY18E CNP of RM41.8m. Downgrade to UP (from OP) with lower TP of RM0.42 (from RM0.60).

FY16 below expectations. FY16 Core Net Loss (CNL) of RM140.3m was below our, and consensus, expectations. The negative deviation stemmed from lower-than-expected margin due to costs arising from: (i) delays in Oil and Gas operations, (ii) impairments in Middle East and Indian operations, and (iii) provisions for doubtful debt worth RM64m. No dividends declared as expected.

Results highlights. FY16 CNL of RM140.3m was down four-fold YoY underpinned by: (i) lower revenue recognition from Malaysia (-30%) and Oil and gas division (-48%) due to slow commencement in certain projects, i.e. KL118 due to onsite issues, and (ii) losses before tax of RM134m (vs FY15?s PBT of RM27.8m) in oil and gas segment due to delay in projects and lower utilization of fabrication plant. 4Q16 CNL of RM183.4m was down 4.7-fold QoQ on the back of lower revenue recognition (-8%), and (ii) provisions for doubtful debts amounting to RM64m. Balance sheet-wise, net gearing is currently at a historical peak of 0.9x.

Misplaced focus? YTD, SENDAI has secured RM801.4m bringing outstanding order-book to c.RM3.0b. As of FY16, its tender-book stood at RM26.2b. Internally, management targets to achieve RM2.5b worth of replenishment in FY17 while we have taken a more conservative stance and assume a replenishment target of RM1.8b. While we applaud management?s ability to secure jobs (currently 45 jobs on-going), we feel that management has been overly engrossed in securing jobs neglecting the profitability of the group (refer overleaf).

Impairments from lift boats? SENDAI?s first lift boat (85% completed) is scheduled for delivery in July 2017 while the second one (55% completed) is scheduled for delivery in 12 months time. While we understand that the client - VAHANA Holdings - has obtained financing for the first lift boat, we remain cautious on the second lift boat considering that should financing be denied, this might potentially risk SENDAI for impairments.

Downgrade in FY17E earnings. Post results, we downgrade our FY17E earnings by 33% after factoring for lower margins assumptions from SENDAI?s Middle Eastern, Indian, and Oil & Gas operations. Meanwhile, we also introduce our FY18E CNP of RM41.8m. Despite the huge cut, we note that earnings might still be at risks from further impairments.

Downgrade to UNDERPERFORM with lower TP of RM0.42. Post adjustment to earnings, we downgrade SENDAI to UP (from OP) with lower TP of RM0.42 (previously RM0.60) based on FY17E applied PER of 9.0x. We believe our downgrade is fair given that: (i) historical earnings have been volatile with impairments of receivables due to payment collection issues, (ii) the potential risk of impairments from the lift boats scheduled for delivery this year, and (iii) the existing high gearing of 0.9x. We believe our valuation at 9.0x PER is justifiable as it is within our targeted small-to-mid cap peers? range of 9-13x.

Source: Kenanga Research - 01 Mar 2017