9M18 CNP of RM47.3m came below our/consensus estimates (at 67%/65%) due to slower-than-expected billings progress from Middle East, India and Malaysia, and higher finance cost. No dividends declared as expected. Reduce FY18-19E CNP by 15-21%. Maintain UNDERPERFORM with a lower TP of RM0.505 (from RM0.665) on a lower valuation of 7.0x FY19E PER.

Below expectations. 9M18 CNP of RM47.3m came below both our/consensus estimates (at 67%/65%) due to slower construction billings and higher finance cost. No dividends declared as expected. We derive our CNP after stripping out: (i) unrealized forex losses of RM4.6m, and (ii) reversal of losses of RM7.8m.

Results highlight. 9M18 CNP registered a decline by 4% YoY in line with a decline in revenue of 7% attributed to lower revenue contributions from Middle East, India and Malaysia, and higher finance cost incurred. QoQ, 3Q18 CNP improved 14% on the back of revenue increasing by 11%. The improvement stemmed from: (i) higher contributions from Middle East, India as well as Oil & Gas segments, which collectively contributes c.85% to SENDAI’s top-line, and (ii) higher PBT margins from its Middle East, India and Malaysia segments, resulting in higher group PBT margin of 4% (1.5ppt).

Outlook. To recap, YTD, SENDAI has clinched RM1.12b worth of jobs making up 75% of our FY18E targeted replenishment of RM1.5b. Given the challenging environment, we conservatively trim our FY18E replenishment target to RM1.2b (from RM1.5b). On the positive side, SENDAI has received payment of USD36m for their first lift boat to Vahana, and we expect its net gearing to come off to c.0.81x (from 1.06x as of 3Q18). On the outlook, while we acknowledge the uncertainties clouding the construction sector, we believe SENDAI’s outstanding order-book of c.RM2.4b which provides 1-1.5 year visibility and its sizeable tender book of c.RM17b would help them weather through uncertain times.

Earnings estimates. Post results, we reduced our FY18-19E CNP estimates by 15-21%, respectively, after: (i) lowering our FY18E replenishment target to RM1.2b, (ii) adjusting our progressive billings, and (iii) adjusting average GP margins from 15% to 14%.

Maintain UNDERPERFORM with a lower TP of RM0.505 based on a lower valuation of 7.0x FY19E PER. We are pegging SENDAI to the lower end of our valuation range (6x-11x) given its: (i) extremely volatile earnings, and (ii) thin margins for its India and its Oil & Gas operations.

Upside risks include: (i) higher-than expected replenishment, and (iii) better-than-expected margins.

Source: Kenanga Research - 30 Nov 2018