FY19 CNP of RM50.8m (-65% YoY) was a let-down, representing only 45%/39% of our/consensus full-year expectations as 4QFY19 slipped into the red. Overall performance was essentially hit by lumpy provisions. FY20E earnings cut by 10% following the poor results. We have lowered our SoP-derived target price to RM2.00 (from RM2.30) to reflect the increased earnings risk on its construction business. Maintain OUTPERFORM.

Way below expectations. FY19 CNP of RM50.8m (-65%YoY) missed expectations, accounting for only 45%/39% of our/consensus full-year forecasts. This comes as 4QFY19 reported CNL of RM46.7 compared with CNP of RM28.8m in 3QFY19 and RM45.1m in 4QFY18. Overall performance was essentially dragged down by provisions made for project claims and variation orders for certain construction projects (the amount of which was not disclosed). A DPS of 2.5 sen was declared.

Results’ highlights. FY19 saw stronger pretax profit (before eliminations) contributions from the cranes (+24% YoY to RM118.0m) and concessions (+12% YoY to RM169.7m) segments. However, this was negated by a slump in infrastructure construction profit (which fell 81% YoY to RM26.7m). In 4QFY19, bottom-line slipped into the red as the infrastructure construction division merely made pretax profit (before eliminations) of RM0.7m, versus 3QFY19’s RM0.3m and 4QFY18’s RM75.2m. As mentioned above, this was mainly due to lumpy provisions.

Outlook. Whilst the Group’s existing outstanding order-books of RM897m for construction jobs and RM582m for cranes are expected to provide a sense of earnings visibility, there may still be risks of further provisions judging by the two sequential quarters of earnings disappointment.

Earnings cut. Post results, we have adjusted our net profit forecast to RM131m (-10%) for FY20 after mainly taking into consideration lower contribution from the infrastructure construction division. We also introduce FY21E net profit of RM141m. Our earnings projections have not factored in any further provisions from the construction division.

Maintain OUTPERFORM with a lower SoP-based Target Price of RM2.00 (from RM2.30 previously). This implies a forward PER of 7.4x on FY20E earnings. Whilst the infrastructure construction division has been a disappointment, this business only accounts for less than 5% of our SoP valuation (see table overleaf) as we have widened our holding company discount to 30% (from 25%) to reflect the increased earnings risk from the Cambodia airport concessions (due to the ongoing CoVid- 19 pandemic) and construction segment.

Risks to our call include: (i) lower-than-expected order-book replenishment target, (ii) delays in construction progress, and (iii) sharp spike in raw material costs

Source: Kenanga Research - 2 Mar 2020