Overall, it posted an improved set of 3QFY20 results, continuing its recovery from a disastrous FY19 plagued with operation hiccups. Nonetheless, we are anticipating weaker quarters ahead as low oil prices coupled with the Covid-19 pandemic has inevitably led to project deferments and job execution disruptions. Maintain MP, with TP of RM0.67.

Deemed below expectations. Despite a satisfactory 9MFY20 recovery (core net profit jumped almost 10-fold YoY), we deem the results as below expectations, at 81% and 87% of our and consensus full-year estimates, respectively. This is because we anticipate a weaker upcoming 4QFY20 on the back of the weakened oil prices, coupled with the implementation of the movement control order (MCO), resulting in inevitable operational disruptions and project deferments. No dividends were announced, as expected.

Overall improved earnings. 3QFY20 reported core net profit of RM9.6m, turning around from YoY core losses in 3QFY19. To recap, last year’s losses were a result of unusually high operating expenses, due to various accounting re-adjustments coupled with D18-related expenses. Meanwhile, 3QFY20 also saw mildly higher level of works, resulting in an increase in revenue. Sequentially, core net profit also improved 16% QoQ, despite the lower revenue. This was due to a more favourable job mix, coupled with lower expenses – resulting in higher margins. Cumulatively, 9MFY20 earnings recovered by almost 10-fold YoY, as last year was heavily plagued with operation disruptions faced in its D18 water injection project.

Expect weaker quarters ahead. Despite posting a solid recovery in the past several quarters from a disastrous FY19, we are nonetheless anticipating weaker quarters ahead. The low oil price environment, coupled with the Covid-19 pandemic has inevitably resulted in project delays and disruptions. We also do not rule out the possibility of impairments in the upcoming 4QFY20 given impending job deferments. Its current order-book still stands at ~RM2b, providing 3-4 years’ visibility.

Maintain MARKET PERFORM, albeit with a higher TP of RM0.67 (from RM0.51 previously), as we pegged our valuations to a higher PBV of 0.4x (from 0.3x previously), given the mild recovery in oil prices of late, thereby improving trading sentiment. Our ascribed valuations are still roughly -1.5SD below its 5-year mean. Nonetheless, investors should be wary of the upcoming weaker numbers, and should adopt a nimble trading strategy or be prepared to weather through a period of volatilities.

Post-results, we cut our FY20E/FY21E CNP by 16%/15% to account for the slower order-book recognition.

Risks to our call include: (i) lower-than-expected margins, (ii) slower than-expected order-book recognition.

Source: Kenanga Research - 21 May 2020