SENDAI announced two new steel structure contracts worth RM272m. NEUTRAL on those contracts as they are within our FY18E replenishment target of RM1.8b. No change to earnings estimates. Maintain UP with lower TP of RM0.740 after rebasing our valuations lower to 8.0x FY18E PER (from 9x) in line with our applied small-mid cap range of 8-13x.

News. Yesterday, SENDAI announced it has secured two new contracts worth RM272m in Dubai: (1) One Za'abeel mix-used development, and (2) the Address Tower Residence IL Primo luxury high-end residential tower. The contracts are slated for delivery in 2020.

Neutral on wins. We are neutral on SENDAI’s first two wins of the year as it is well within our FY18E replenishment target of RM1.8b – accounting for 15% with another RM1.5b to be achieved. Assuming a 36-month span for the contracts coupled with PBT margins of 6%; the projects are expected to contribute c.RM4.1m p.a. to the bottom-line.

Outlook. Currently, SENDAI’s outstanding order-book stands at c.RM2.5b, providing visibility for the next 1-1.5 years. Meanwhile, SENDAI’s first lift boat initially 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 as well. 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 secure a 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.

Maintain earnings. We make no changes to our FY17-18E CNP.

Maintain UNDERPERFORM with lower TP of RM0.740 (previously RM0.800) as we rebase our valuations lower to 8.0x FY18E PER (from 9.0x Fwd PER) 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 - 18 Jan 2018