FY18 results came in below expectations as 4Q18 result turned loss-making due to slower job billings on top of margin compressions. Moving forward, with potential job wins expected to only in 2H19-FY20, we believe earnings have already peaked. This led to continued shrinking of order-book, while tender-book remains flat, signalling no further new bids in recent months. Maintain UNDERPERFORM with TP of RM0.62.

Below expectations. FY18 core net profit of RM63.3m came in below expectations at only 68%/67% of our/consensus forecasts, dragged by poorer-than-expected performances in its (i) oil and gas segment due to slower-than-expected profit recognition from Nord Stream 2, and (ii) renewable energy segment due to margins compressions from equipment fabrication and steam turbines. No dividends were announced, as expected.

Poorer FY18 results, losses in 4Q18. FY18 core earnings plunged 35% YoY, dragged by: (i) higher taxes (effective tax rate of 44% vs FY17 of 7%), which we believe is due to lumpy tax expense recognition from overseas projects, particularly Nord Stream 2, as the project progressed to advanced phases, coupled with (ii) losses in associates and JV, of which included certain impairment losses. That said, results were actually better at the gross profit level, albeit with deteriorated margins, driven by increased job progression in the Nord Stream 2 project (helping its oil and gas segment), and higher contributions from its renewable energy segment due to increased boiler and steam turbine business.

On the quarterly level, 4Q18 posted core losses of RM4.2m (versus YoY core profit of RM42.6m in 4Q17, and QoQ core profit of RM21.5m in 3Q18), dragged by: (i) huge plunge in its oil and gas segment, on the back of lower job progressions from Nord Stream 2 and slower activity levels, especially in the Asia-Pacific Region, coupled with (ii) margins compression from its renewable energy segment, arising from lower margin mix of equipment fabrication and steam turbines, and (iii) losses registered from its JV and associates (losses of RM7.9m, widened 26% QoQ from 3Q18, and, YoY, plunged from profit of RM2.4m in 4Q17), although this quarter’s losses includes certain impairment expenses.

Earnings have peaked. With no significant new contract wins recently, the company’s order-book has dwindled down to RM1.1b (from RM1.6b in the previous quarter), of which Nord Stream 2 is understood to be the largest contributor. As such, with major new wins likely to be secured only in 2H19 or even FY20, we believe earnings have already peaked and will suffer a declining trend moving forward. The company currently has a tender book of ~RM6b (no changes from previous quarters, signalling absence of any new bids in recent months), mainly from overseas bids in Australia and Europe, although we suspect this tender- book still comprises several controversial projects (e.g. Trans-Sabah Gas Pipeline), which we suspect sums up to ~RM1b in value.

Maintain UNDERPERFORM, on the back of little earnings visibility moving forward given dwindling order-book, and tender-book risks. Post-results, we lowered our FY19E earnings by 21%, accounting for lower contributions from oil and gas, and renewable energy segments, while simultaneously introducing our FY20E numbers. Our current forecasts imply earnings decline of 21-18% for FY19-20.

Meanwhile, our TP is raised to RM0.62 (from RM0.57 previously) as we roll forward our valuation base-year to FY20E. We ascribed “floor” valuations of 0.5x PBV at -2S.D. from its mean PBV of 1x, given the aforementioned concerns. Our TP also implies forward PER of 9x - somewhat in line with its 2-year average.

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

Source: Kenanga Research - 26 Feb 2019