Review

• EA Technique Bhd (EA Tech) reported 9M16 core net profit of RM33.4mn (-45% YoY). This is below our expectations, comprising 45% of our full year forecast. The shortfall mainly stemmed from higher-than-expected costs for the NMB (North Malay Basin) EPCIC contract.

• QoQ, bottomline growth was more than doubled due to higher revenue recognition across all segments, particularly from the NMB Floating Storage Offloading (FSO) vessel project (+58% QoQ). However, margins were weaker due to higher opex.

• YTD, profits were weaker mainly due to lower margin for the NMB contract. This was more than offset additional contribution from three new harbor tugs (Tg. Puteri XXIII, XXIX and XXVII) that were delivered in May Sept 2016.

• The group’s orderbook contracted to RM890mn in 3Q16 (2Q16: RM1.07bn), with extensions valued at RM350mn. We reckon this was due to chunky recognition for the NMB contract, and because the group is unable to secure new engineering projects during this sector downcycle.

• To-date, we estimate that the group has recognized revenue in excess of RM650mn for the NMB project. This translates to approximately 80% of the original contract value of USD192mn – which is in-line with management’s guidance of 85% progressive billing by end-FY17.

Impact

• We incorporate the following assumptions to our forecasts:- 1) removed contribution from Nautica Muar in 4Q16-1Q17. According to management, this FSO is only expected to commence its new contract extension with Vestigo in end-1Q17; 2) deferred contribution for CPP tanker, MT Maliaou starting from 1Q17 (previous: 2H16) due to a delay in commencement of its contract; 3) increasing opex, finance and depreciation costs in FY17-18. As a result, our FY16-18 forecasts are reduced by 4%-32%.

Valuation

• We change our valuation methodology for EA Tech to P/B (previous: P/E). This is to be consistent with our valuation of other O&G upstream service providers (i.e. SapuraKencana, UMW Oil & Gas, MMHE). In addition, this is in-lieu of cyclical earnings for O&G companies, oil price volatility and deteriorating earnings visibility . Furthermore, during this current sector downcycle, where M&A activities are likely to happen, we believe asset values are a more appropriate measure of an O&G company’s value.

• On top of that, the bulk of EA Tech’s assets comprise:- 1) marine transport and port services vessels that have locked in long-term contracts, and 2) dry dock yard facility in Perak. Therefore, we believe these assets are able to hold their values despite a cyclical downturn.

• We value EA Tech based on 0.6x FY17 P/B, or 1x multiple discount to the sector bellwether SapuraKencana Petroleum, which we value based on 0.7x CY17 P/B. Due to strong macro headwinds, we believe it is best to avoid the O&G sector at this juncture. On the back of this, we downgrade EA Tech to a Sell (previous: Buy).

Source: TA Research - 29 Nov 2016