At 19%/20% of our/consensus estimates, we deem 1Q18 CNP within expectations as we foresee higher construction billings from the Middle East in subsequent quarters. We take comfort that SENDAI is finally delivering its first lift- boat in June 2018, which will ease their net gearing to 0.7x. That said, we maintain our UP call on lower TP of RM0.72 as its oil & gas and Indian operations remain weak, which will continue to pose earnings risks to the group.

Broadly within. We deem 1Q18 CNP of RM15.1m broadly within our/consensus estimates (at 19%/20%) as we are expecting more construction works in the Middle East to enter advanced billing stage for the quarters ahead. No dividends were declared, as expected. We derive our CNP after stripping out: (i) unrealized forex gains of RM8.4m, and (ii) reversal of losses worth RM3.2m.

Highlights. 1Q18 CNP of RM15.1m decreased 22% QoQ mainly due to: (i) weaker revenue contribution (-25%) from its structural steel segment, which saw lower billings in the Middle East, India and Malaysia, and (ii) higher interest expense (+37%). 1Q18 CNP was unchanged YoY on the back of their marginally lower revenue (-1%). Positively, we note that EBITDA margin improved YoY by 2ppt from lower operating expenses (-33%) arising from streamlined operations, but it was hit by higher interest cost (+233%) which muted bottom-line growth.

Structural steel contract flows. Results aside, SENDAI announced RM182.3m of new job wins from the Middle East and Malaysia of which we are NEUTRAL as FY18 YTD (5M18) wins of RM716m is still within our FY18 replenishment target of RM1.8b., SENDAI’s outstanding order-book stood at c.RM2.0b, providing visibility for the next 1-1.5 years. Despite the recent switch in government which dampened replenishment outlook for small-mid cap contractors, we think our replenishment target for SENDAI is intact as they are backed by tender book of RM9.0b mainly comprising works from the Middle East.

A sigh of relief at O&G. After numerous delays, SENDAI is finally set to deliver their first lift-boat to Vahana in June 2018 as Vahana had successfully secured a charter contract from Saudi Aramco. This will in turn prompt banks to release the final payment worth USD36m (cash) to SENDAI. We are relieved over the eventual delivery and expect SENDAI’s net gearing to come down to c.0.70x (from 0.94x as of 1Q18) as SENDAI (i) reduces its borrowings using cash proceeds of USD36m and (ii) transfer out USD27m worth of debts attached to the first lift-boat which is currently parked in SENDAI’s balance sheet to Vahana. That said, we are still cautious within the oil and gas space as SENDAI has yet to secure a single project YTD despite their sizeable tender book of RM5b and its oil and gas order-book is drying up with outstanding orders of c.RM 150m, which will last them half a year.

Earnings. Post results, we keep our FY18/19E CNP unchanged.

Maintain UNDERPERFORM with a lower TP of RM0.720 (from RM0.740) after rolling forward valuation base year to FY19 on unchanged 8.0x PER. While we have downgraded valuations for most of the small-mid cap contractors within our universe in view of uncertainties by the new PH government, we keep SENDAI’s valuation unchanged as they are mostly involved in construction works in the Middle East instead of Malaysia. That said, we keep our UP call while pegging SENDAI to the lower end of our valuation range (7x-12x) given SENDAI’s extremely volatile earnings and thin margins for its India and its oil and gas operations. Risks to our call include higher-than- expected contract wins and margins.

Source: Kenanga Research - 01 Jun 2018