Review

• EA Technique Bhd (EA Tech)’s FY16 core net profit of RM50mn (+1% YoY) was within our expectations, at 100% of our full-year forecast. FY16 headline net profit of RM8.8mn includes FX translation losses of RM41mn.

• Note that FY15 results were restated, due to:- 1) over-recognition of revenue from construction contract due to estimated total budgeted costs used to calculate % of completion, 2) effects of unrealised FX on amount due from customer contract; and 3) tax effects of (1) and (2).

• No dividend was declared for FY16, which was below our expectations. Recall that the group paid FY15 DPS of 2.3 sen.

• YTD, there was topline improvement for both of EA Tech’s fleet for marine transportation (+6% YoY) and port services (+14% YoY). This was partially due to new fleet additions, including three harbor tugs that were delivered in May-Sept 2016.

• Recognition of revenue for the North Malay Basin (NMB) FSU project was stable in FY16. To-date, the group has recognized revenue of RM684mn for the NMB project. This translates to circa 80% of its contract value of USD192mn. Recall that 10% will be paid to EA Tech over its 2-year warranty period, whilst the balance 5% is for hook-up and commissioning works (HUC). The latter will likely take place in Apr-17.

• According to management, the group has ‘partially’ recognized variation order (VO) claims for NMB. Recall that total VO claims amount to USD10mn-15mn. Meanwhile, outstanding orderbook amounts to approximately RM950mn (3Q16: RM890mn), whilst extension contracts are valued at RM350mn.

• For FY17, we expect improved profits on the back of:- 1) warranty sum and VO recognition for NMB, where there are no corresponding costs, 2) HUC works for NMB, and 3) deployment of new vessels, including:- i) one chemical tanker in Apr-17 ii) MV Nautica Tg. Puteri XXVIII harbour tug in Feb-17, and iii) one oil tanker in Apr-17. This will more than offset:- 1) completion of EPCIC works for NMB, and 2) lower contribution from Nautica Muar. For the latter, we expect its new contract to commence in 2H17. Recall that its contract was renewed at lower DCRs following redeployment to a new field.

Impact

• We incorporate the following to our forecasts:- 1) FY16 unaudited numbers, 2) deferred start of warranty period for NMB, and 3) higher finance costs in FY18. As a result, our FY17/18 forecasts are revised by 3.3%/-11%. In addition, we introduce FY19 earnings of RM61mn (+4% YoY)

Valuation

• We maintain Sell on EA Tech with unchanged TP of RM0.44 based on 0.65x CY17 P/B. Rerating catalysts include:- 1) recovery of O&G capex spend, hence enabling orderbook recovery for engineering segment, and 2) sizeable new transport contracts from RAPID.

Source: TA Research - 1 Mar 2017