We are bringing a closure to our previous ‘Trading Buy’ call on EATECH due to its earnings volatility, dragged by potential cost overrun from its EPCIC project. We are projecting EATECH to incur losses of RM13.5m but subsequently return to the black with net profit of RM27.5m in FY18. Not Rated with a Fair Value of RM0.45 based on 0.8x FY18E PBV.

Disappointing earnings performance. Recall that we had issued a “Trading Buy” call on the ship owner and operator of marine vessels, E. A. Technique (M) Bhd (EATECH) in November 2015. Its share price had plunged 70% since then due to poor earnings results. It registered core net loss of RM77.1m in 1Q17, and in 1Q17 it posted a net loss of RM3.3m, slipping from a profit of RM25.2m in 1Q16. These huge losses were largely due to higher depreciation, higher finance cost and increase in EPCIC in relation to additional request from client.

Additional costs erode margins. To recap, EATECH was awarded an EPCIC contract of a floating storage and offloading facility (FSO) for a Full-Field Development Project in the North Malay Basin by Hess Exploration and Production Malaysia B.V. worth USD191m. The project currently is 83% completed and slated for sail away in 3Q17 and it may take about one month to execute the HUC work. Due to additional work request from the client which might not be fully recoverable, EATECH has provided for foreseeable loss of RM31.0m this quarter for the EPCIC project for Hess. We do not discount the possibility of future write-back if EATECH is able to recoup some of these variation orders from the client.

Steady core business. Its core business in marine transportation, offshore storage of O&G and port marine services is expected to generate steady income backed by order-book of RM840m as of 1Q17 spanning until FY25 with additional RM350m to be secured if extensions were granted. Currently, vessel utilisation rate stood at 90% with 65% are on long-term charters. Out of the 40 marine vessels owned by EATECH, 12 vessels will be off hire in FY17-18 and the company is looking for contract renewal with existing clients if possible.

Earnings recovery in FY18. We are projecting EATECH to narrow its losses to RM13.5m in FY17 due to some provision write back for the EPCIC project. Furthermore, 2H17 earnings is expected to improve with the potential delivery of 1 unit of chemical tanker and 1 unit of oil tankers as well as the recognition of the charter revenue for FSO Nautica Muar in early 3Q17. Going forward, in view of the challenging environment, we do not expect EATECH to engage in large EPCIC project in the near term but to prioritise its marine transportation, offshore storage of O&G and port marine services. Thus, FY18 is projected with a bottom-line of RM27.5m assuming full-year contribution from new vessels and successful renewal of the expiring vessels.

Not Rated at RM0.45. Despite the repayment of some borrowings in 1Q17, net gearing remains relatively high at 1.67x (vs 1.72x in 4Q16) due to reduction in equity dragged by losses in 1Q17. In summary, we are closing our previous position for EATECH with a Not Rated call at a Fair Value of RM0.45 based on FY18E PBV of 0.8x, switching from price-earnings valuation model due to the earnings volatility, dragged by the EPCIC project. Such valuation is still higher than the average oil & gas sector’s valuation of 0.7x due to its steady recurring core business model. Risks to our call are: (i) higher-thanexpected contribution from the EPCIC project, and (ii) higher-thanexpected fleet expansion.

Source: Kenanga Research - 29 Jun 2017