1H17 CNP of RM31.2m is within expectations accounting for 53% of our and consensus estimates, excluding unrealized gains of RM4.7m from our CNP. No dividends declared as expected. Maintain our FY17-18E earnings estimates and reiterate our UNDERPERFORM call on an unchanged TP of RM0.75 based on 9.0x FY18E PER.

Within expectations. 1H17 CNP of RM31.2m was within our and consensus forecasts accounting for 53% of both our estimates. Note that we had stripped off unrealized forex gains of RM4.7m to derive our CNP. No dividends announced as expected.

Results Highlight. 2Q17 CNP improved marginally by 4% QoQ on the back of higher revenue (+18%) due to higher work progress in Middle East (+10%), India (+48%), and Oil and Gas division (+51%). We note that their Oil and Gas division had returned to the black with a segmental PBT of RM2.2m (vs 1Q17’s loss of RM4.7m) from higher utilisation of their plant. 1H17 CNP was down 20% YoY due to higher depreciation charges (+25%), slightly weaker PBT margins from India (-1.5ppt) due to weaker margin project mix, and losses stemming from Oil and Gas segment due to its lower plant utilization. Net gearing remained high at 1.1x (vs 1Q17 net gearing of 1.0x).

Outlook. YTD, SENDAI has secured RM1.38b worth of contracts vs our RM1.8b target. We note that we had taken a more conservative stance and assume a replenishment target of RM1.8b in FY17 vs. management’s target of RM2.5b as we feel that management’s target might be overly bullish given that historically they have only been sustaining replenishment at RM1.8b and below. Currently, SENDAI’s outstanding order-book stands at c.RM2.7b, providing visibility for the next 1-1.5 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.

No changes to earnings forecasts. Post results, we maintain our FY17-18E CNPs of RM58.9-70.0m.

Maintain UNDERPERFORM with unchanged TP of RM0.75. We reiterate our UP call with an unchanged TP of RM0.75 based on 9.0x FY18E PER. We believe that our 9.0x applied valuation, which is at the lower end of our targeted 9-13x for small-mid cap contractors is fair given: (i) SENDAI’s extremely volatile historical earnings, (ii) potential risk of impairments from the lift boats scheduled for delivery in FY18, and (iii) existing high gearing of 1.1x (as of 2Q17) vs peers’ average of 0.10x.

Source: Kenanga Research - 29 Aug 2017