Post-results’ conference call, we are overall neutral, albeit with some positive takeaways given the company securing a slew of smaller local pipe manufacturing jobs, keeping order-book flattish QoQ. However, we feel that earnings could still suffer a decline for the next 1-2 years as its orderbook is expected to dwindle in the coming quarters. Maintain UNDERPERFORM with TP of RM0.62.

1Q19 results recap. To recap, 1Q19 registered core net profit of RM18.8m, which improved QoQ from losses, due to margins recovery in its oil and gas segment from higher project delivery, but came in poorer YoY due to slower market activities in the Asia-Pacific region. Specifically, we gathered that over 70% of its oil and gas segmental revenue for the quarter was contributed solely by the Nord Stream 2 project. The project is expected to continue as the biggest earnings contributor for the group until its eventual completion in 3Q19.

Order-book sustained by some new smaller jobs. The company’s order-book of ~RM1.1b managed to remain flat QoQ, despite greater progressions in the major projects, propped up by a slew of multiple smaller job orders received during the quarter, consisting mainly of local pipe manufacturing jobs, most of which are expected to be delivered this year. This is a positive nonetheless, providing at least some added earnings visibility for the year, although we expect margins to be competitive, with EBIT margins estimated at around low-to-mid-singledigit. For now, the Nord Stream 2 project remains the largest contributor of its order-book.

New major wins to come in 6-18 months. With tender-book of ~RM6b with no changes from the past several quarters, the company is in active tender in the main key markets of Australia and Africa. Overall, we expect most of these new wins to come in the next 6-18 months, with jobs execution most likely in 2021.

Maintain UNDERPERFORM, as we feel its earnings trend could suffer a momentary decline for the next 1-2 years, with its order-book expected to dwindle over the next couple of quarters, unless new major contracts are secured and projects execution can be delivered earlierthan-anticipated. We kept our TP unchanged at 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 gap moving forward given dwindling orderbook. Our TP also implies a forward PER of 9x - somewhat in line with its 2-year average. No changes were made to our FY19-20E numbers.

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 - 15 May 2019