FY20 missed expectation, registering huge core losses, dragged by losses in its E&C and E&P segments. The quarter saw a massive impairment of RM3.3b to account for risk of order-book materialisation amidst current market conditions. This led to a one-third deterioration of its equity book value, with its net-gearing soaring above 1.0x. Maintain UP, with lowered TP of RM0.05, given order and tender-book materialisation risks, ever-increasing borrowings and high net-gearing, on top of lack of earnings visibility in the near-term.

FY20 missed expectations. FY20 registered core loss of RM1.3b (arrived after stripping-off non-core items e.g. impairments, gains on disposal and forex), hugely missing expectations at 3.0x/2.6x of our/consensus loss forecasts. The huge mismatch was due to poorer than-expected engineering and construction (E&C) and exploration and production (E&P) segments. No dividends were announced, as expected.

Huge core losses, even after excluding huge impairments. The quarter saw core losses deepened by nearly 8x QoQ and nearly doubled YoY, dragged by: (i) steeply widened losses in its E&C segment, due to lower activities, and (ii) E&P segment plunging to losses due to unsuccessful explorations, higher depletion, depreciation and amortisation. However, these were slightly offset by higher drilling rigs utilisation, with 7 out of 15 rigs operating during the quarter, as compared to 5 rigs in 3QFY20 and 6 rigs in 4QFY19.

Cumulatively, FY20 core losses widened by 50%, dragged by: (i) huge deterioration in E&C margins, and (ii) E&P plunging to losses due to aforementioned reasons. However, these were offset by lower depreciation expenses following impairments made in 4QFY19. Drilling rigs utilisation stayed somewhat flattish YoY at ~40%.

Uncertainty in future outlook. During the quarter, the company recognised massive impairments totalling RM3.3b, surpassing last year’s impairments of RM1.5b. These impairments were made to directly address the risk of materialisation of its order-book, in anticipation of delays and prolonged duration of projects amidst current market conditions. As a direct result of the impairments, the company saw its equity book value slashed by a third, with its net-gearing level soaring to exceed 1.0x (from 0.7x) over the quarter. On top of these impairments, the company is also undergoing a cost optimisation exercise which includes employee pay cuts across the board. Management aims for these cost-saving efforts to help reduce its annual opex by RM500m. The company also guides that earnings would be challenging for the upcoming few years, with growth only possible beyond FY22. Additionally, as part of its planned capital management program, the company is on track to refinance most of its borrowings by end of the year in order to extend the maturity of existing debts.

Maintain UNDERPERFORM, with lowered TP of RM0.05 (from RM0.08) – pegged to “floor” valuations of 0.1x PBV. Post-results, we widened our FY21E losses by 270% from lowered contributions from E&C and E&P, while simultaneously introducing new FY22E figures.

Overall, with order-book and tender-book at materialisation risks amidst the current downturn, combined with its ever-increasing borrowings and high net-gearing levels, on top of having absolutely no earnings visibility in the foreseeable future, we feel that our “floor” valuations ascribed are well justified.

Risks to our call include: (i) better-than-expected recognition of order book and project execution margins, and (ii) huge improvements in cash flow and balance sheet.

Source: Kenanga Research - 30 Apr 2020