1QFY20 is deemed broadly within expectations with a YoY turnaround from the red on project progression and higher marine activities. However, we anticipate weaker quarters ahead, with slower heavy engineering activities during the MCO and low oil demand to slow down marine activities, while weak oil prices could place new tenders at risk. Expect possible impairments within the year amidst this downturn. Upgrade to MP, with TP of RM0.45, given recent decline in share price.

1QFY20 deemed within expectations. 1QFY20 recorded net profit of RM6.1m, coming in at 64%/33% of our/consensus full year earnings estimates. However, we deem the results to be broadly in line with expectations in anticipation of weaker quarters ahead. No dividends were announced, as expected.

Stronger quarter YoY, but weaker sequentially. YoY, 1QFY20 earnings reversed from last year’s deep losses, helped by: (i) heavy engineering returning to the black due to reversal of cost provisions as a result of higher progression of on-going projects, and (ii) narrowed losses for marine segment, from increased contributions from LPG vessels and conversion works.

Sequentially, net profit narrowed 34% QoQ, dragged by its marine segment plunging into losses due to increased overheads coupled with lower conversion works. This was partially offset by a marginal turnaround in its heavy engineering, due to similar aforementioned reasons of project progressions.

Uncertainty in outlook. We find it reasonable to assume that the company could potentially post a weaker set of results for its upcoming 2QFY20 quarter. Activities in the yard have only resumed works recently, after being suspended to comply with the movement control order. Additionally, global low oil demand could lead to lower vessel movements, thereby hampering its marine segment, while weak oil prices could place job tenders at risk of deferment or renegotiation. The group had even acknowledged risks of potential impairments given the current crisis as well as risks in its upcoming financial results. On the positive side, its latest secured order book of RM2.7b could still sustain revenue for the next ~2-3 years, although replenishment of order-book is in greater uncertainty. Compared to peers, its healthy balance sheet with a net-cash position would ensure the company’s survivability even in an extended downturn.

Upgrade to MARKET PERFORM, albeit with a lower TP of RM0.45 (from RM0.60 previously), as we lowered our valuations down a notch to 0.3x PBV (from 0.4x) given the increased uncertainty in its outlook. Our ascribed valuations are pegged to the stock’s trough valuations at close to -2SD from its mean.

However, our call is upgraded to MARKET PERFORM following the decline in its share price (29% drop since our UNDERPERFORM call on 10 March 2020). We believe prices should be fairly valued from here – a premium against its peer SAPNRG trading at 0.1x PBV, given its healthier and more resilient balance sheet. No changes were made to our FY20-21E earnings.

Risks to our call include: (i) poorer-than-expected dry docking activities, (ii) higher-than-expected costs overrun in heavy engineering, and (iii) project execution and earnings delivery.

Source: Kenanga Research - 30 Apr 2020