9M18 came in below expectations, dragged by associate losses and higher taxes. However, earnings were actually better YoY on greater job execution in Nord Stream 2. Moving forward, we expect earnings to decline beyond 2018, given that major order-book replenishment is expected only to occur in 2H19-FY20. Meanwhile, tender-book stayed flat from last quarter, signalling no new bids in recent months. Maintain MARKET PERFORM, with lower TP of RM0.85.

Below expectations. 9M18 core net profit of RM68.2m (arrived after stripping-off forex and gains on disposals) came in below expectations at 60% of our, and 66% of consensus, full-year earnings forecast. The mismatch was due to wider losses in its 27%-owned associate PENERGY (Not Rated), coupled with higher-than-expected taxes. No dividends were announced, as expected.

Results buoyed by higher project recognition. YoY, 9M18 core net profit leapt 39%, largely thanks to (i) better oil & gas segment, driven by greater jobs execution in the Nord Stream 2 project, coupled with (ii) better renewable energy segment from higher sales of boiler and steam turbines, masking losses in associates.

Sequentially, core net profit of RM21.5m declined 17% QoQ, due to higher taxes with an effective tax rate (35% vs. 22% last quarter). In fact, results were actually slightly better QoQ at PBT level, despite the lower revenue due to lesser activities in the Malaysian oil and gas projects, offset by: (i) greater jobs execution in Nord Stream 2, resulting in an improved oil and gas segment, and (ii) better renewable energy’s performance due to higher sales from boiler and steam turbine businesses.

Peak earnings in FY18. The company’s tender-book currently stands at RM5.9b; no changes from last quarter – signalling no new bids in recent months. However, we believe that this value still includes the now suspended Trans-Sabah Gas Pipeline (TSGP) and Multi-Product Pipeline (MPP) projects. Removing these controversial projects, we estimate a revised tender-book value of closer to RM5-5.3b, buoyed by overseas bids in Europe, Africa and Australia. With major new wins likely to be secured only in 2H19 or even FY20, we see earnings peaking in FY18, underpinned by current outstanding order-book of RM1.6b, of which Nord Stream 2 is the largest contributor, with expected completion in 2Q19. Post-results, we lowered our FY18-19E earnings by 17-26%, after accounting for: (i) losses in associate, and (ii) higher effective tax rate assumption.

Maintain MARKET PERFORM. In light of the (i) results disappointment, (ii) declining forward earnings trend, and (iii) tender-book and order- book replenishment risks, we have opted to lower our valuations down a notch to 10x PER, from 11x previously, arriving to a lowered TP of RM0.85 (from RM1.25 previously). Overall, we see little catalyst in the immediate term, unless and until its tender-book materialises into successful job wins, plugging the hole in its earnings gap.

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

Source: Kenanga Research - 28 Nov 2018