SENDAI announced new contract wins secured by its group of companies in Singapore, India and Qatar collectively worth RM406m. Neutral on the wins. No change to FY18-19E earnings estimates. Maintain UNDERPERFORM with an unchanged TP of RM0.505 based on an unchanged valuation of 7.0x FY19E PER.

New contracts kick off 2019. Yesterday, SENDAI announced that its group of companies in Singapore, India and Qatar have secured new contracts worth a total of RM406m. In Singapore, it secured a hi-tech data processing and computing facility project while in India, it clinched a state-of-the-art secretariat-building project featuring two 45-storey towers. In Qatar, it won the grating support structure works for an arch along the Lusail Expressway.

Neutral on wins. We are neutral on these wins as they collectively falls within our FY19 replenishment assumption of RM1.6b. YTD, SENDAI’s replenishment stands at RM406m. Recall in FY18, SENDAI bagged RM1.44b worth of job exceeding our FY18 replenishment assumptions by RM241m, which we included into our FY19 replenishment of RM1.6b as bulk of the works will commence in 2019. As such, we have a remaining replenishment target of RM953m after accounting for this recent win of RM406m. Assuming an average PBT margin of 4% and a 36-month span for the contracts, the projects are expected to contribute c.RM5.2m per annum to the bottom-line.

Outlook. Currently, SENDAI’s outstanding order-book stands at c.RM2.5b, providing visibility for the next 1-1.5 years. We also note that it has received payment of USD36m for their first lift boat to VAHANA in 2Q18. We believe that it will not be long before SENDAI receives its remaining payment of USD54m and we expect its net gearing to come off to c.0.81x (from 1.06x as of 3Q18). We maintain our less upbeat outlook for now, as we continue to closely monitor and await the following catalysts; (i) more concrete signs of upbeat prospects for the construction sector and earnings delivery, (ii) higher order-book replenishments from SENDAI’s existing tender book of c.RM10.0b, and (iii) reduction in net gearing following the remaining payment of USD54m. Should the above developments take place, we may look to review our estimates.

No changes to earnings. We make no changes to our FY18-19E CNP as the contract wins fall within our replenishment assumptions.

Maintain UNDERPERFORM with an unchanged TP of RM0.505 based on an unchanged valuation of 7.0x FY19E PER, in line with our applied small-mid cap’s range of 6-11x. We pegged SENDAI towards the lower end of our valuation range given its: (i) extremely volatile earnings pattern, and (ii) thin margins for its India operations, and oil and gas segment.

Upside risks to our call include: (i) higher-than expected order-book replenishment, and (ii) better-than-expected margins.

Source: Kenanga Research - 11 Jan 2019