Results Review

• Excluding exceptional losses amounting to RM177.5mn (financial assets fair value loss of RM101.7mn, allowance for doubtful debt of RM60.3mn and a forex loss RM15.5mn), Eversendai’s FY16 core loss of RM80.0mn came in grossly below expectations, versus our net profit forecast of RM50.9mn and consensus estimate of RM56.4mn. The variance was due mainly to project margin markdown, unexpected delays in project funding as well as low utilization of the fabrication facility.

• It was the first time Eversendai reported full-year loss since it was listed in 2011. For FY16, it recorded a core loss of RM80.0mn, versus a core profit of RM47.4mn a year ago. The significant loss was largely resulted by margin markdown, unexpected delays in project funding as well as low utilization of the fabrication facility.

• In 4Q16, it recorded severe core loss of RM122.9mn versus RM3.9mn of core profit in the immediately preceding quarter for the same reason mentioned above.

• Despite seeing growth in new contracts secured and building up of outstanding order book, it reported the lowest quarterly revenue since 1Q15 due to delay in commencement of major key projects in Malaysia and reversal in recognition of revenue in the oil and gas segment.

• The oil & gas segment was the worst performer. It incurred RM131.4mn and RM134.3mn of quarterly loss and full-year loss respectively due mainly to a critical review of project costing, taking into consideration higher costs resulting from delays in project funding, low utilisation of fabrication factory, penalty and storage charges of machineries procurement.

Impact

• Adjustments are made to reflect the actual RM1.8bn of new contracts secured in FY16 versus our earlier assumptions of RM2.0bn, as well as raising our FY17 to FY18 order book replenishment assumptions to RM1.2bn to RM1.5bn. Consequently, we trim FY17 earnings by 2.8% but raise FY18 earnings by 6.2%.

Outlook

• The group has achieved record new contracts secured of RM1,793.6mn in FY16, surpassing the previous record of RM1,725.3mn achieved in FY15. The group also revealed that it has secured RM801.4mn of new contract YTD, boosting the outstanding order book to about RM3.2bn

Valuation

• Subsequent to the earnings revisions, we reduce the target price from RM0.595 to RM0.58, based on unchanged 6x CY17 EPS. This is after applying 2x PE multiple discount to our target PE multiple of 8x. The discount is in view of sizeable collectibles in the oil and gas division. Downgrade the stock to HOLD.

Source: TA Research - 1 Mar 2017