• Revenue improved 43.5% YoY, but earnings dragged down operational expenses.
• The construction of the Bangladesh solar farm is delayed three quarters and is estimated to complete end FY19e.
• We revised FY19e earnings downwards by 36% due to delay in the solar plant. Downgrade to ACCUMULATE with a lower target price of S$0.24. Our valuation is derived from a 10X PE of FY19 earnings.

The Positives

+ Revenue improvement is driven by better contributions from all business segments. Revenue from Engineering & construction (E&C) increased 7% YoY to $7m. The modular segment helped offset the weakness in the structural steel business which is still suffering from lacklustre conditions and margin compression. Solar energy revenue in Singapore enjoyed 62.5% YoY growth to $2.5m as a result of new contracts secured in FY18 and previously delayed projects. Corrosion Prevention (CP) segment jumped 44% YoY to $2.5m due to increased orders from plant operations. The increased orders are a result of improving sentiment in the marine & offshore sector supported by stronger oil prices.

The Negatives

– Substantial delay in the Bangladesh solar project. The Bangladesh solar project was slated to be completed early FY19. Complications such as land issues, regulatory approvals and weather conditions have set the completion date back approximately three quarters. We expect the completion by the end of FY19. Anticipated earnings for the project are $4mn/year.

– Operational expense is higher than expected. Total OPEX increased 27% YoY to $4.8m. The increase is in part due to business development and travelling expenses. These expenses are incurred for the ramp-up of the modular business. Other operating expense increased 58% due to the depreciation of the redeveloped Hetat office building used by the E&C segment. We expect these expenses to decrease once the modular business is operating at a steady state. This is achieved by operational efficiencies in relation to the design, knowledge and repetitive nature of projects.

Outlook

We expect modular to continue its contribution towards the E&C segment, while structural steel remains in a challenging environment. Key risks include further delays in the construction of the solar project.

Downgraded to ACCUMULATE with a lower target price of S$0.24

We downgraded our BUY recommendation to ACCUMULATE with a lower target price of S$0.24. We made a downward revision of FY19e earnings by 36% given the delay in the construction of the solar project. Our valuation is derived from a 10X PE of FY19 earnings. This is in line with the Singapore construction industry.

Source: Phillip Capital Research - 20 Nov 2018