Eversendai Corporation (SENDAI)’s 9M17 CNP of RM49.4m came in above our/consensus expectations at 84%/82% of full-year estimates due to lower-than-expected effective tax rate stemming from higher-than-expected contributions from UAE which were not subjected to tax. No dividends as expected. Increase FY17-18E earnings by 12% each after adjusting for lower tax rates. Maintain UP with a higher TP of RM0.800 with unchanged 9.0x FY18 PER.

Above expectations. 9M17 CNP of RM49.4m came in above our/consensus expectations due to lower-than-expected effective tax rate stemming from higher-than-expected contributions from UAE (c.80% of contributions in 3Q17) which were not subjected to tax. No dividends declared as expected.

Results Highlight. 3Q17 CNP of RM18.4m increased 16% QoQ despite the marginal drop in revenue (-4%) due to: (i) lower effective tax rates (-7ppt) as 80% of PBT contribution was from UAE not subjected to tax, and (ii) lower operating expenses (-25%). 9M17 CNP increased 15% YoY mainly due to the stronger revenue contributions (+6%) from Middle East (+21%) and India (+90%) as construction contracts secured in FY16 picked up pace as it entered into advance billings stages.

Outlook. YTD, SENDAI has secured RM1.6b 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 RM2.0b as we felt 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 which is scheduled for delivery for 3Q17 has been delayed to 1Q18 as certification and commissioning of the lift boat is more stringent than expected. Meanwhile, we note that delivery of the second lift boat which is at c.55- 60% completion scheduled for delivery by 1H18 may be delayed to a later date given the longer than expected duration for certification. While we understand that the client - VAHANA Holdings - has obtained conditional financing for the first lift boat (whereby banks will only release payments to SENDAI if VAHANA manages to secures charter contract 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. We highlight there is also a risk of impairment in FY19 for the first lift boat should VAHANA fail to secure a charter within 12 months once the first lift boat is ready for delivery in 1Q18. However, we opine that 12 months is relatively sufficient to secure a charter but will monitor the situation closely and review when necessary.

Higher earnings estimate. Post results, we raise our FY17-18E CNP by 12% each to account for the lower effective tax rate.

Maintain UNDERPERFORM with higher TP of RM0.800 (previously RM0.750) based on unchanged 9.0x FY18E PER which is in line with our applied small-mid cap range of 8-13x. We pegged SENDAI towards the lower end of our valuation range given: (i) the continuous delay in delivery of lift boats, (ii) SENDAI’s extremely volatile historical earnings, (iii) potential risk of impairments from the lift boats scheduled for delivery in FY18, and (iv) existing high gearing of 1.0x (as of 3Q17) vs. peers’ average of 0.10x.

Source: Kenanga Research - 28 Nov 2017