1H18 CNP of RM30.1m came below our/consensus estimates (at 38%/40%) due to slower-than-expected billings progress from Middle East. No dividends declared as expected. Lowered FY18-19E CNP by 11-8%, respectively. Maintain UP call with lower TP of RM0.665.

Below expectations. 1H18 CNP of RM30.1m came below expectations to our/consensus estimates (at 38%/40%) due to slower- than-expected billings progress from Middle East. No dividends declared as expected. We derive our CNP after stripping out: (i) unrealized forex gains of RM1.0m, and (ii) reversal of losses worth RM6.3m.

Results highlight. 1H18 CNP only registered marginal decline of 3%, YoY despite revenue declining by 9% (decline from Middle East, India & Malaysia affected by festive season), as the impact from the weaker revenue was cushioned by the improvements in operating margin to 6.1% (+0.4ppt) coupled with a positive contribution from minority interest of RM1.8m vs. outflow of RM4.5m in 1H17. QoQ, 1Q18 CNP is flattish despite compression in operating margin to 5.2% (-1.8ppt ) as the impact is negated by lower financing cost, which came off by 34% coupled with a positive minority contribution of RM2.7m.

Outlook. Its outstanding order-book remains fairly healthy at c.RM2.4b with 1-1.5 year visibility. To recap, SENDAI clinched RM716m worth of jobs in 1H18 and we believe it may be tough to achieve our target of RM1.8b given the current uncertain landscape. As such, we cautiously reduced our target order-book to RM1.5b which we believe is more achievable. On the positive side, we gather that SENDAI has received payment of USD36m for their first lift boat to Vahana, and we expect its net gearing to come off to c.0.80x (from 0.96x as of 2Q18).

Earnings estimates. Post results, we reduced our FY18-19E CNP estimates by 11-8%, respectively, after reducing our RM1.8b target order-book for both years each to RM1.5b and RM1.6b. That aside, we also lowered our progressive billings and margins from India and Oil & Gas division.

Maintain UNDERPERFORM with a lower TP of RM0.665 (from RM0.720) on an unchanged valuation of 8.0x FY19E PER. We are keeping 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.

Upside risks include: (i) huge wins from Saudi Aramco, (ii) higher- than expected replenishment, and (iii) better-than-expected margins.

Source: Kenanga Research - 29 Aug 2018