We deem the turnaround in 1Q19 to be broadly within expectations, in anticipation of a weaker 2H19 on dwindling order-book (~RM1.1b). Overall, we believe earnings may have already peaked, as major job wins are expected to come in only in late-2019 or even 2020, backed by tenderbook of ~RM6b, with job execution likely in 2021. Maintain UNDERPERFORM with TP of RM0.62.

Within expectations. 1Q19 registered core net profit of RM18.8m (after stripping off impairments reversal and forex losses), coming in at 37% of our full-year forecasts. Nonetheless, we deem this to be broadly within our expectations, anticipating a weaker 2H19, as we project most of its remaining order-book (~RM1.1b) to be recognised within the coming 1-2 quarters, especially considering its biggest order-book contributor, the Nord Stream 2 project, is expected be fully completed by 3Q19. However, with 1Q19 coming in at 28% of consensus, we deem the streets’ expectations to be over-optimistic. We believe the market could have possibly imputed in project execution from immediate new wins throughout the year (if any), which we think is unlikely. No dividends were announced, as expected.

Poorer YoY results, but recovered from losses last quarter. YoY, 1Q19 core net profit came in 9% lower, mainly dragged by its oil & gas segment (-21%) due to lower level of market activities in the Asia Pacific region, partially masked by stronger renewable energy segment (slightly less than doubled) on the back of improvements in all businesses in the segment, which includes equipment manufacturing, boiler and steam turbines. Sequentially, 1Q19 earnings bounced back from losses suffered in 4Q19, heavily driven by higher activities in oil and gas segment (+59%), coupled with a slight growth in renewable energy segment (+7%).

Earnings have peaked. Given its expected dwindling order-book with no significant new contract wins in recent months, we believe earnings may have momentarily peaked, and could start to suffer a declining trend for the next 1-2 years. We expect major new wins to be secured only in late-2019 or even 2020, backed by its tender-book at ~RM6b, with project execution most likely to commence only in 2021. Key markets the company is tendering for include Australia and Africa, albeit with competitive margins.

Maintain UNDERPERFORM, with an unchanged TP of RM0.62, pegged to “floor valuations” of 0.5x FY20E PBV at -2SD from its mean of 1x PBV, on the back of an earnings growth gap moving forward given dwindling order-book. Our TP also implies a forward PER of 9x - somewhat in line with its 2-year average. No changes were made to our numbers post-results, with our forecasts implying earnings decline of 21-18% for FY19-20.

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 - 14 May 2019