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Eversendai Corp Bhd
(Dec 1, 65 sen)
Maintain neutral with target price (TP) of 73 sen:
Eversendai’s first nine months of financial year 2014 (9MFY14) net profit came in below expectations at only 38% and 31% of our and consensus’ full-year forecasts respectively. It was still unable to substantially recover its outstanding variation order (VO) claims during 3QFY14. Not helping either was the recognition of “costs incurred on the development of new businesses” during 9MFY14.

On a positive note, year-to-date, it has secured RM1.1 billion new jobs (vis-à-vis our full-year assumption of RM1.2 billion). Its order backlog currently stands at RM1.6 billion, which will keep it busy for the next 18 months. While its key market and segment remain in the Middle East and structural steel respectively, it is powering ahead with expansion both geographically (for instance, to the Commonwealth of Independent States) as well as into related segments (oil and gas fabrication and petrochemical plant construction).

We cut our FY14 to FY15 earnings forecasts by 31% each to factor in a lower possibility of a full recovery of its outstanding VO claims.

Key risks include: (i) new job wins in FY14 to FY16 falling short of our assumption of RM1.2 billion per annum (ii) an escalation in input costs, and (iii) failure or delays in the settlement of VO claims.

We acknowledge that Eversendai is: (i) a globally competitive structural steel contractor (ii) a good proxy to the oil wealth (and indulgence of the oil-rich countries in new iconic buildings which require highly complex steel structures), and iii) an up-and-coming oil and gas play.

However, we believe it needs to monetise its strengths more effectively. Not helping is the weakened prospects of the oil and gas industry on the back of the recent sharp fall in crude oil prices.

We cut our TP by 31% to 73 sen from RM1.06 previously, based on 10 times revised FY15 forecast earnings per share, in line with our one-year forward target price earnings ratio of 10 to 16 times for the construction sector. — RHB Research, Dec 1

Eversendai-02DEc2014_theedgemarkets

 

This article first appeared in The Edge Financial Daily, on December 2, 2014.

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