Below are key takeaways from a briefing by management of EA Technique (EA Tech):-

• According to management, variation orders (VOs) for the North Malay Basin (NMB) FSU project amount to USD10mn-15mn. EA Tech is currently engaged in active negotiations with the client, Hess, to resolve these VOs. A partial amount of the total claims have been approved by Hess and will likely be recognized in 4Q16. Nevertheless, we maintain our estimates for now, given the uncertain nature of VOs. Based on our observations of local EPCIC contractors, VOs typically take a protracted period to claim. And in many cases, VO negotiations usually extend well past project delivery dates. In addition, the final approved amount varies from billed claims. Therefore, we prefer to err on the conservative for now, and not incorporate these non-recurring VO earnings into our forecasts. We will review our target price, which is based on CY17 P/B, when the VO claims are certain.

• Delivery of the NMB FSO to Hess will take place upon the end of the monsoon season. This is expected to be in late Jan-17 or early Feb-17. Thereafter, EA Tech will conduct HUC (Hook-Up and Commissioning) works for the vessel. This is regardless of whether the Central Processing Platform (CPP) for the NMB field is ready. Understandably, there is an urgency for EA Tech to deliver this FSU in order to receive payment from the client without further delay. This is because the bullet repayment for borrowings that EA Tech secured to finance the vessel’s construction is due in May-17.

• In the worst case scenario where the CPP is not ready to receive the FSU, the vessel will likely need to be placed on standby mode offshore. According to management, the cost of hiring a skeletal crew for this purpose amounts to approximately USD5k per day. Nevertheless, EA Tech is not contractually obliged to shoulder these extra costs. This suggests that Hess will either reimburse EA Tech, or engage its own standby team.

• The group is eyeing the subcontract for operations and maintenance (O&M) of the North Malay Basin FSO. We understand from management that Hess had recently awarded the O&M contract for the entire field, including operations of the FSO, to an Australian-based company. Nevertheless, EA Tech may have an advantage, given that it is the incumbent EPCIC contractor for this vessel.

• Dry dock costs of circa USD2mn-3mn for Nautica Muar will be amortized throughout its contract period. Therefore, this extinguishes our earlier concerns of lumpy costs recognition in 4Q16-1Q17. Recall that this vessel was demobilized Apr-17, and will be deployed to Vestigo’s field in end- 1Q17 after completion of upgrade works.

• To recap, back in 4Q15, EA Tech recognized a provision of circa RM21mn for the acquisition of MTCE Engineering (MTCE)’s topside for Nautica Muar FSU. Management’s earlier guidance was that this amount will be written back after credit facilities are secured. However, following a new conditional S&P agreement, there will not be a reversal of provisions for this amount. Instead, EA Tech will receive net cash inflow for this revised acquisition that will be reflected on its balance sheet.

Impact

• Maintain earnings forecasts.

Valuation

• We maintain our TP of RM0.44 based on 0.6x CY17 P/B. Rerating catalysts for the stock include:- 1) sustained crude oil price rally leading into O&G capex recovery, and hence new engineering contracts, 2) the group secures the 20-year O&M contract for North Malay Basin FSO, 3) EA Tech secures major tanker contracts from Petronas Chemicals for RAPID, and 4) new FPSO or FSO projects.

Source: TA Research - 13 Dec 2016