FY20 saw a huge widening of losses (within our expectation, nonetheless), dragged by Covid-19 related expenses, coupled with poorer overall activity levels. Moving forward, FY21 should be supported by better marine activities from a recovery of LNG dry-docking, while FY22 should see a bulk of Kasawari EPCIC’s earnings being recognised. Downgrade to MP albeit with higher TP of RM0.44. Since our OUTPERFORM call in Oct 2020, the stock has managed a return of 41%.

FY20 losses within our expectation. FY20 core loss of RM96.8m (arrived after stripping-off RM300m impairment loss) came in within our expectation at 104% of our full-year loss forecasts. However, the results fell below market’s expectations, exceeding consensus’ loss forecasts by 31%, possibly due to a weaker-than-expected performance from its heavy engineering segment. No dividends were announced, as expected.

Severely impacted by Covid-19. FY20 saw a huge widening of losses mainly due to provisions and higher unabsorbed overheads recognised as a result of the Covid-19 pandemic, amounting to RM189m throughout the year. Recall that in 2QFY20, the group’s yards saw suspension of works in compliance with the MCO. This was on top of lowered activity levels suffered in its heavy engineering and marine segments. Sequentially, 4QFY20 plunged into losses on the back of ~RM50m worth of Covid-19 related provisions and expenses. This more than offset the stronger marine activities from an increase in LNG dry-docking repair jobs.

Deep losses unlikely to be repeated. Barring any unforeseen changes (e.g. sudden suspension of yard works), we believe steep losses as in FY20 is unlikely to be repeated. Thus far, yard works are still allowed to operate under MCO 2.0. That said, we expect FY21 to benefit from a recovery of LNG dry-docking activities, in tandem with a global demand increase in LNG, though border restrictions and stiff competition may still lead to a challenging business environment. Meanwhile, FY22 earnings should be lifted by earnings recognition from its Kasawari EPCIC project (current completion at 30%) as the project progresses closer towards completion. Current order-book stands at RM1.9b, of which >90% is derived from the Kasawari project.

Downgrade to MARKET PERFORM, albeit with higher TP of RM0.44. Post-results, we turn around our FY21E assumptions into a net profit of RM3.9m, from losses of RM42m previously, after factoring in stronger marine activities and lower heavy engineering losses. Meanwhile, we also introduce new FY22E numbers. In tandem, our TP is also raised to RM0.44, from RM0.38 previously, as we raise our ascribed PBV valuation to 0.35x, from 0.2x previously, to price in its recovery. Our ascribed valuation is close to -1SD from its mean.

Nonetheless, our call is downgraded to MP following the rebound in its share price. Ever since our upgraded OUTPERFORM call in Oct 2020, the share has managed a return of 41%.

We are also temporarily ceasing active coverage on the stock for now, as we are in the midst of reshuffling our stock coverage universe. However, we will still be keeping close watch on the counter, and will be releasing updates under our “On Our Radar” series of reports from time to time, as the situation warrants.

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

Source: Kenanga Research - 10 Feb 2021