This article first appeared in The Edge Financial Daily on January 19, 2018

Eversendai Corp Bhd
(Jan 18, 83.5 sen)
Maintain underperform with a lower target price (TP) of 74 sen: Yesterday Eversendai Corp Bhd announced it had secured two new contracts worth RM272 million in Dubai: One Za’abeel mix-used development and the Address Tower Residence IL Primo luxury high-end residential tower. The contracts are slated for delivery in 2020. 

We are neutral on Eversendai’s first two wins of the year as it is well within our financial year 2018 (FY18) replenishment target of RM1.8 billion — accounting for 15% with another RM1.5 billion to be achieved. Assuming a 36-month span for the contracts coupled with profit before tax (PBT) margins of 6%, the projects are expected to contribute about RM4.1 million per annum to the bottom line. 

Currently Eversendai’s outstanding order book stands at about RM2.5 billion, providing visibility for the next one to 1.5 years. Meanwhile, Eversendai’s first lift boat initially scheduled for delivery for the third quarter of 2017 (3Q17) has been delayed to 1Q18 as certification and commissioning of the lift boat are more stringent than expected. Meanwhile, we note that delivery of the second lift boat — which is about 55% to 60% completed — is scheduled for the first half of 2018 (1H18) may be delayed to a later date given the longer-than-expected duration for certification as well. While we understand that the client — Vahana Holdings — has obtained conditional financing for the first lift boat (whereby banks will only release payments to Eversendai if Vahana manages to secure a charter contract for the first lift boat), we remain cautious on the second lift boat in case it fails to secure financing, potentially raising the risk of impairments. We highlight there is also a risk of impairment in FY19 for the first lift boat should Vahana fail to secure a charter within 12 months once the first lift boat is ready for delivery in 1Q18. However, we opine that 12 months is relatively sufficient to secure a charter but will monitor the situation closely and review when necessary. 

Maintain “underperform” with lower TP of 74 sen (previously 80 sen) as we rebase our valuations lower to eight times FY18 price earnings ratio (PER) (from nine times forward PER) in line with our applied small-mid cap range of eight times to 13 times. We have pegged Eversendai towards the lower end of our valuation range given the continuous delay in delivery of lift boats, Eversendai’s extremely volatile historical earnings, potential risk of impairments from the lift boats scheduled for delivery in FY18, and existing high gearing of one time (as of 3Q17) versus peers’ average of 0.10 times. — Kenanga Research, Jan 18