1Q17 CNP of RM15.3m was above our expectation accounting for 42% of our full-year estimate but within consensus expectations (24%). The positive variance was due to our overly conservative margins of their projects in the Middle East, India and Malaysia. No dividends declared as expected. Upgrade FY17-18E earnings by 62%-60% respectively. Post earnings adjustment, we maintain UP with a higher TP of RM0.80 (from RM0.49).

1Q17 above expectations. 1Q17 CNP of RM15.3m was above our expectation accounting for 42% of our full-year estimate but within consensus expectations (24%). The positive variance was due to our overly conservative margins of their projects in Middle East, India and Malaysia. No dividends declared as expected.

Result highlights. 1Q17 CNP of RM15.3m was down 33% YoY mainly due to lower revenue (-10%) because of lower billings from their Oil and gas division (-53%) due to lower utilization of fabrication plant on the oil and gas industry. QoQ, CNP turned profitable in 1Q17 from a loss of RM183m due to improvement in revenue (+16%) and most notably the lack of provisions of doubtful debts worth RM64m in which 4Q16 had registered. That said, it is notable that net gearing is currently at a historical peak of 1.0x.

Risks still out there. Currently, SENDAI?s outstanding order-book stood at c.RM3.2b providing visibility for the next 2 years. We note that we have taken a more conservative stance and assume a replenishment target of RM1.8b in FY17 vs. management?s target of RM2.5b. On a separate note, SENDAI?s first lift boat is scheduled for delivery in July 2017 (payment by September/October) and the second one is scheduled for delivery by 1H18. While we understand that the client - VAHANA Holdings - has obtained financing for the first lift boat, we remain cautious on the second lift boat in case it failed to secure financing, potentially raising the risk of impairments.

Upgrade in FY17-18E earnings. Post results, we downgrade our FY17-18E earnings by 62%-60% respectively after factoring for higher margins assumptions from SENDAI?s Middle Eastern, Indian, and Malaysia operations.

Maintain UNDERPERFORM with higher TP of RM0.80. Despite the upgrade in earnings valuing SENDAI at a higher TP of RM0.80 (from RM0.49) on unchanged 9.0x FY18 PER, we reiterate our UP call given that (i) SENDAI?s historical earnings has been extremely volatile, (ii) the potential risk of impairments from the lift boats scheduled for delivery in FY18, (iii) existing high gearing of 1.0x (as of 1Q17) vs peers? average of 0.10x and (iv) Oil and Gas division still in the red due to the lack of plant utilization. Considering SENDAI?s unfavourable attributes, we believe our 9.0x valuation, which is at the lower end of our targeted 9-13x for small mid cap contractors is fair.

Source: Kenanga Research - 26 May 2017