SENDAI (5205) - Eversendai: Downgrade to Sell (TP: 0.67)

Maintain sell and UNDERPERFORM with a target price of RM0.67 per share. We believe that the share price has caught up with fundementals. We also believe that investors should be wary that certain quarters are artificially inflating Eversendai's share price. Based on our channel checks, these quarters have started to take profit on Eversendai the last 2 days.

Despite the presence of syndicates, we assess Eversendai fundementally based on its business prospects.
1Q17 above expectations. 1Q17 CNP of RM15.3m was above our expectation accounting for 42% of our full-year estimate but within consensus expectations (24%). The positive variance was due to our overly conservative margins of their projects in Middle East, India and Malaysia. No dividends declared as expected.

Result highlights. 1Q17 CNP of RM15.3m was down 33% YoY mainly due to lower revenue (-10%) because of lower billings from their Oil and gas division (-53%) due to lower utilization of fabrication plant on the oil and gas industry. QoQ, CNP turned profitable in 1Q17 from a loss of RM183m due to improvement in revenue (+16%) and most notably the lack of provisions of doubtful debts worth RM64m in which 4Q16 had registered. That said, it is notable that net gearing is currently at a historical peak of 1.0x.

Risks still out there. Currently, SENDAI's outstanding order-book stood at c.RM3.2b providing visibility for the next 2 years. We note that we have taken a more conservative stance and assume a replenishment target of RM1.8b in FY17 vs. management's target of RM2.5b. On a separate note, SENDAI's first lift boat is scheduled for delivery in July 2017 (payment by September/October) and the second one is scheduled for delivery by 1H18. While we understand that the client - VAHANA Holdings - has obtained financing for the first lift boat, we remain cautious on the second lift boat in case it failed to secure financing, potentially raising the risk of impairments.

Maintain UNDERPERFORM with higher TP of RM0.67. We reiterate sell call given that (i) SENDAI's historical earnings has been extremely volatile, (ii) the potential risk of impairments from the lift boats scheduled for delivery in FY18, (iii) existing high gearing of 1.0x (as of 1Q17) vs peers' average of 0.10x and (iv) Oil and Gas division still in the red due to the lack of plant utilization.