FY17 CNP of RM68.7m is within our expectation (104%) but above consensus (110%) due to lower-than-expected tax rates. No dividends as expected. Separately, SENDAI announced new contract wins worth RM261.7m which we are neutral on as FY18 YTD wins of RM533m is still within our replenishment target of RM1.8b. Maintain FY18E earnings and introduce FY19E earnings of RM77m. Maintain UP with unchanged TP of RM0.740 on 9.0x FY18E PER.

Within ours/above consensus. FY17 CNP of RM68.7m came in within our expectation at 104% but above consensus at 110% due to lower-than-expected effective tax rates, likely from a higher-than- expected contribution mix from UAE, which is not subject to tax. No dividends declared as expected. Our CNP is calculated after reversing forex gains worth RM18.0m. Separately, SENDAI announced another RM261.7m worth of jobs in the Middle East which we are NEUTRAL on as FY18 YTD wins of RM533m is still within our replenishment target of RM1.8b.

Results highlight. FY17 CNP of RM68.7m improved from a CNL position of RM140.3m in FY16 mainly due to: (i) the absence of provisions of doubtful debts worth RM64m incurred in FY16, and (ii) increased in progress works leading to higher revenue (+16%) as well as improved PBT margins in Middle East and Malaysia. 4Q17 CNP of RM19.2m improved 5% QoQ mainly due to: (i) improved progress work done in Malaysia (Malaysia revenue: +112%) on the back of more profitable projects i.e. KL118 leading to Malaysia’s segmental PBT turning positive to RM3.7m vis-à-vis 3Q17’s LBT (loss before tax) of RM5.3m, and (ii) lower interest expense (-46%) as net gearing improved marginally to 0.96x (from 1.00x).

Outlook. Currently, SENDAI’s outstanding order-book stands at c.RM2.5b, providing visibility for the next 1-1.5 years. Meanwhile, SENDAI’s first lift boat initially scheduled for delivery in 1Q18 has been delayed yet again to 2Q18 as certification and commissioning of the lift boat is more stringent than expected. We highlight that this is the 2nd time the delivery has been delayed. We also note that delivery of the second lift boat which is at c.55-60% completion (stagnated) initially scheduled for delivery by 1H18 has also be delayed to a later date given that it has been put on hold due to the challenging economic environment. We are negative on these developments and only expect the second lift boat to be delivered earliest in FY19. While we understand that the client- VAHANA Holdings- has obtained conditional financing for the first lift boat (whereby banks will only release payments to SENDAI 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 that 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 2Q18. However, we opine that twelve months is relatively sufficient to secure a charter but will monitor the situation closely and review when necessary.

Earnings estimates. We make no changes to our FY18E CNP and introduce our FY19E CNP of RM76.7m.

Maintain UNDERPERFORM with unchanged TP of RM0.740 on 8.0x FY18E PER in line with our applied small-mid cap range of 8-13x. We pegged SENDAI towards the lower end of our valuation range given: (i) the continuous delay in delivery of lift boats, (ii) SENDAI’s extremely volatile historical earnings, and (iii) potential risk of impairments from the lift boats scheduled for delivery in FY18.

Source: Kenanga Research - 28 Feb 2018