4QFY20 core profit of RM16.5m fell short of expectation given the lockdown-led delayed billing claims which dragged a normally seasonal strong quarter. Nonetheless, earnings recognition is likely to be pushed forward to FY21 while the start of recognising BT construction profit should lead earnings higher. In all, we still like the company as a niche utility infrastructure play. Maintain OP with revised TP of RM1.15.

4QFY20 missed forecast. At 81% of our estimate, FY20 core profit of RM55.8m came below our estimate of RM69.1m by 19% primarily due to further delayed billings for its local as well as Philippines projects in 4QFY20. Against its job schedule, there was c.RM120m worth of local rail works, including MRT2, KVDT and JB-Gemas double-track which were delayed in April and May. Meanwhile, there is still no dividend declared during the period as expected with cash conserved for expansion.

Better sequential results on construction earnings for BT. Despite top-line dipping 8% to RM200.3m, 4QFY20 core profit jumped 64% to RM16.5m from RM10.0m. This was due to the start of recognition of construction profit for its 70%-owned ODM Power Company Ltd (OPL) which manages the “Build-and-Transfer” concession asset in Cambodia. So far, OPL has completed 8% work progress in 4QFY20 while the construction earnings fetch higher profit margin than the typical EPCC job. This also explained the MI which doubled to RM5.4m from RM2.7m. In term of job progress; the JB-Gemas double track is completed up to 19% job progress in 4QFY20 from 16% in 3QFY20, KVDT to 71% from 68%, MRT2 to 63% from 54% while Alex Corp’s Tatay at 68% from 61%.

Weaker YoY earnings on delayed billing. YoY, 4QFY20 core profit tumbled 51% from RM33.5m as revenue declined 30% from RM285.3m while FY20 core income contracted 23% to RM55.8m from RM72.4m as revenue dipped 2% to RM797.3m. The decline in earnings was largely due to lower-than-expected billing claims given the lockdown restrictions in Malaysia as well as the Philippines, although 2H had always been the stronger half in the past.

Earnings to be pushed forward to FY21. While 2HFY20 results were disappointing given the low billings, earnings are likely to be pushed forward to FY21 with the lockdown being eased locally as well as overseas. Besides, key local projects namely MRT2 and KVDT as well as the Cambodian Tatay project are advancing to a higher stage which mean better margin in the coming quarters. In addition, the construction profit from OPL should boost earnings further in the next two years. Meanwhile, its current order-book has increased to RM1.67b from RM1.48b three months ago which will keep them busy for the next two years and sustaining earnings growth.

Keep OUTPERFORM. Post 4QFY20 results, we cut FY21 earnings estimates by 9% as we lowered operating margin by 1% while RM750m work recognition is maintained. Meanwhile, we introduced FY22 forecasts where earnings expected to grow 8% with work assumption of RM800m. Meanwhile, with new FY20A BV of 30.5 sen and unchanged -1SD 5-year PBV moving average of 3.76x, our new target price is RM1.15 from RM1.05 previously. Although 2HFY20 results were disappointing, we still like this niche utility infrastructure play which could potentially benefit from the revival of mega projects domestically and the fast growing energy infrastructure development market in Indochina. Thus, our OUTPERFORM rating is maintained.

Risks to our call include: (i) failure to replenish order-book, and (ii) cost overruns

Source: Kenanga Research - 28 Aug 2020