FY18 results came in below expectations, dragged by lower vessel deliveries (two vessels vs. eight in FY17). The 4Q18 quarter saw massive write-down and impairments totalling to RM589m, representing a 34% write-off from FY17 book value. We believe this depicts the bleak outlook in its shipbuilding division, with no new orders announced since Feb-2016. Downgrade to MP, with lowered TP of RM1.05, based on changed valuations of 0.4x PBV.

Below expectations. FY18 core net profit of RM28.3m (arrived after stripping-off forex, inventories written-down and impairments) came in below expectation, making up only 89% of our full year earnings forecasts. The earnings disappointment was due to lower-than- expected vessel deliveries. No dividends were declared, as expected.

A poorer set of results overall. YoY, FY18 core earnings plunged 60%, in tandem with the revenue drop of 62%, mainly due to lower vessel deliveries during the year of two vessels vs. eight vessels in FY17. 4Q18 core earnings of RM28.3m plummeted 93% YoY, in tandem with 85% deterioration in revenue, as no vessels were delivered during the quarter in contrast to four vessels in 4Q17. QoQ, core net profit tanked 58% as its vessel chartering segment slipped into core losses of RM2.9m (arrived after removing forex gains RM20.1m) during the quarter.

Huge write-offs during the quarter. In the 4Q18 quarter, the company had written down inventories of RM518.2m, as well as registering an impairment loss of receivables of RM70.6m. Added together, this represents a 34% write-off from its book value since end-FY17. We believe these write-off and impairments depict its bleak outlook, especially in its shipbuilding business. As we understand, there have been no new orders announced since Feb-2016. Meanwhile, we expect the JUGCSU chartered to PEMEX in the Gulf of Mexico to be the main earnings contributor in the near term. Following the disappointing results, we trimmed FY19E earnings by 10% to account for lower vessel deliveries, while also introducing new FY20E numbers.

Downgrade to MARKET PERFORM. With the company’s book value lowered following the write-down and impairments, our TP is also cut to RM1.05 (from RM1.40 previously) based on unchanged valuations of 0.4x PBV on FY19E. Our downgraded call is premised on the lacklustre outlook in the shipbuilding division due to a lack of new orders from services players as the OSV market is still reeling from an oversupply situation.

Risks to our call include (i) better-than-expected vessel order, (ii) sooner-than-expected project sanction of a second JUGCSU, and (iii) better-than-expected margins.

Source: Kenanga Research - 3 Sept 2018