SENDAI announced that they are planning a 10% private placement which would raise c.RM75.8m mainly for the reduction of short term debts. The proposal is expected to reduce FY18E EPS by 5% while only bringing net gearing down to 0.85x (from 1.0x). Maintain FY17E earnings but tweak FY18E earnings higher by 4% after accounting for the interest savings. Maintain UP with a lower TP of RM0.75.

Private placement to par down debts. Yesterday, SENDAI announced that they are planning a 10% private placement equivalent to 77.4m shares where the tentative issue price of RM0.98/share would raise RM75.8m to be used mainly for the reduction of short-term debts (refer back for detailed breakdown of proceeds utilisation). The proposed private placement is expected to be completed by 1Q18.

EPS dilution is expected. We reckon that market could see the proposed placement negatively given that this proposal would dilute existing shareholders and reduce FY18E EPS by 5% despite factoring for the interest savings post reduction of debt. Furthermore, SENDAI’s net gearing is only expected to reduce by 15% to 0.85x (from 1.0x as of 1Q17) which is still the highest amongst small-mid cap contractors within our universe with an average net gearing of 0.10x.

Outlook. YTD, SENDAI has secured RM1.3b worth of contracts vs our RM1.8b target. 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. Currently, SENDAI’s outstanding order-book stands at c.RM3.2b providing visibility for the next two years. On a separate note, SENDAI’s first lift boat is scheduled for delivery in 3Q17 (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 fails to secure financing, potentially raising the risk of impairments.

Minor tweak in FY18E earnings. Post results, we maintain our FY17E earnings but tweak our FY18E earnings higher by 4% after factoring for interest savings from the proposed placement which is expected to be completed in FY18.

Maintain UNDERPERFORM with lower TP of RM0.75. Despite the upgrade in earnings, we value SENDAI at a lower TP of RM0.75 (from RM0.80) on unchanged 9.0x FY18 PER given the FY18E EPS reduction of 5% from share dilution. We reiterate our UP call given: (i) SENDAI’s extremely volatile historical earnings, (ii) 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) its Oil and Gas division, which is 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 - 16 Aug 2017