1H18 core earnings jumped 3-fold to RM46.6m, broadly within expectations, driven by job execution of Nord Stream 2. Moving forward, we believe its latest tender book of RM5.9b faces downside risks following the suspension of TSGP and MPP, with a revised tender book guesstimated to be closer to RM5-5.3b. Downgrade to MP and TP of RM1.25, following tender book risks, coupled with some earnings weakness expected post-completion of Nord Stream 2.

Deemed broadly within expectations. 1H18 core earnings of RM46.6m (arrived after stripping-off forex and gains on disposals) came in at 41% of our as well as consensus FY18 forecasts. Nonetheless, we deem the set of results to be broadly within expectations, in expectation of stronger order-book recognition in the coming quarters. No dividends were announced, as expected.

Overall stronger results. 1H18 core earnings more than tripled YoY, largely thanks to greater jobs execution in the Nord Stream 2 project, masking poorer performance from its renewable-energy segment (-15% YoY) due to compression in profit margins from process equipment and steam turbines. Similarly, 2Q18 core earnings almost tripled YoY due to continuing execution in Nord Stream 2. Sequentially, core earnings grew 25% QoQ due to better renewable-energy segment which more than doubled QoQ, coupled with better oil and gas segment (+23% YoY).

Downside risks to current tender book. We gathered that the company’s tender-book currently stands at RM5.9b. However, we believe there may be some downside risks to the current tender book value, given that the Trans-Sabah Gas Pipeline (TSGP) and Multi- Product Pipeline (MPP) have been suspended. Stripping the two projects off, we guesstimate a revised tender book value of closer to RM5-5.3b, mostly buoyed by bids in Europe, Africa and Australia. Nonetheless, we expect any major new job wins to be likely secured closer to 2H19. Meanwhile, FY18-19E earnings will be underpinned by current outstanding order-book of RM1.93b, most of which is from Nord Stream 2, with expected completion in 2Q19. Post-results, we made no changes to our FY18-19E earnings.

Downgrade to MARKET PERFORM. We downgrade our call to MP following the aforementioned downside risks to the company’s tender- book value, coupled with earnings weakness post-completion of Nord Stream 2 as order-book replenishment is anticipated to only occur mostly in 2H19. All-in, we lowered our TP to RM1.25 (from RM1.80 previously) after reducing our PER valuations down a notch to 11x, in- line with its two-year average (from 12x previously at +0.5SD from average), while rolling forward our valuation base year to FY19E.

Risks to our call include: (i) sooner-than-expected order-book replenishment, (ii) sooner-than-expected tender book recovery, and (iii) better-than-expected margins.

Source: Kenanga Research - 3 Sept 2018