In a supposedly strong seasonal quarter, 3QFY22 instead posted the weakest quarterly results with core profit of merely RM4.2m, no thanks to additional logistic cost, and lower revenue. However, with new KLIA aerotrain to kick- start in 4QFY22, earnings are likely to be back on track. Maintain OP with a lower TP of RM0.87 as it is a niche utility infrastructure play with undemanding valuation.

3QFY22 below expectation… with core profit of merely RM4.2m, bringing 9MFY22 core income to RM28.1m which made up only 37% of our full-year FY22 forecast. This was primarily due to higher logistic costs, where the extra cost amounted to c.2% of revenue, for delivery of equipment for Malaysia projects. On the other hand, project mix at different stages which was skewed toward the early stages means lower margin and hence lower profit. No dividend was declared during the quarter as expected.

…hit by extra logistic cost. Despite 6% growth in revenue to RM192.6m owing to higher revenue from early-stage projects, core profit was only RM4.2m in 3QFY22 as compared to RM11.8m recorded in the preceding quarter. The weaker results were mainly attributed to higher logistic costs for delivery of equipment mentioned above on a global rising fuel cost environment. The project mix revenue recognition mentioned above also contributed to lower project margin in 3QFY22.

Lower revenue led YoY earnings lower. YoY, 3QFY22 core profit fell 57% to RM4.2m as revenue contracted by 16% to RM192.6m. This was largely due to lower rail projects while most of its active projects are at the tail-end with also lower revenue recognition while the higher logistic costs mentioned above also contributed to lower earnings currently. YTD, 9MFY22 core profit declined 32% to RM28.1m from RM41.2m due to similar reasons mentioned above as revenue fell 11% over the year.

KLIA aerotrain project to start in 4QFY22 which could help to lead top-line growth. Meanwhile, we understand that there is no delivery of equipment due to lockdown in China and the backlog of equipment delivery has likely completed; hence, the extra logistic cost in 4QFY22 could be an isolated event. On the other hand, as ODM project is on- going till Sep 2022, MI will continue to stay higher on construction profit from this concession project till 1QFY23. Orderbook had decreased slightly to RM1.93b as at Mar 2022 from RM2.00b three months ago. Post result, we cut FY22-FY23 forecast substantially by 33%-19% to reflect the dismal 2QFY22 results on higher logistic costs while we also revise projects’ operating margin assumptions to 13%- 11% from 14%-14% previously.

Maintain OUTPERFORM. While 3QFY22 results were disappointing, the heavy selling pressure on the stock could have overshot its valuation which trades below 10x PER currently. Post-earnings revision, our new target price is reduced to RM0.87 (1-year mean of 12.2x FY23 PER) from RM1.11 (3-year mean of 14x FY22 PER). Hence, we maintain OUTPERFORM rating on the stock for its niche utility infrastructure play as well as for its ability to secure both local and overseas contracts amid a booming energy infrastructure development and rail electrification prospects in ASEAN. Risks to our call include: (i) failure to replenish order-book, and (ii) cost overruns.

Source: Kenanga Research - 30 May 2022