Triyards Holdings - UOB Kay Hian 2016-07-11: 3QFY16 ~ Lower Earnings On One Off Costs And Higher Interest Expense

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TRIYARDS HOLDINGS LIMITED RC5.SI 

Triyards Holdings (ETL SP) - 3QFY16: Lower Earnings On One-Off Costs And Higher Interest Expense

• Triyards reported a lower-than-expected net profit of US$4.1m, down 24% yoy on lower gross profit margin and higher interest expense. 
• Net gearing rose higher to 67% but was as expected. Its US$175m order for a pair of liftboats was shifted from end-FY16 to 2QFY17. The contracting environment remains challenging and we cut our contract win assumption. 
• Overall FY16-18 earnings are impacted by 21-36% as a result of the downward revisions. 
• Maintain HOLD with a lower target price of S$0.44. Entry price: S$0.35.

RESULTS

Net profit of US$4.1m, down 24% yoy and below expectations. 

• Triyards reported 3QFY16 net profit of US$4.1m, down 24% yoy. 
• The result was very much below expectations, with 9MFY16 net profit of US$15.6m coming at 55% of our full-year estimate. 
• The underperformance was pinpointed to a 5ppt decline in gross profit margin vs the prior period, and a 69% rise in interest expense.

Gross margin down on one-off tendering costs and project mix. 

• Gross profit margin was reported at 17%, down 5ppt yoy from 22% in 3QFY15. The decline was attributed to one-off tendering costs in new markets such as Europe and Taiwan, and lower margins from its non-liftboat projects. 
• Excluding the one-off, GP margin would have improved by 1.0-1.5ppt. 
• Adjusted net profit would have come in at about US$5.4m, almost unchanged vs 3QFY15.

Net gearing rises further to 67% from 55% in previous quarter. 

• Net gearing increased further from 55% in 2QFY16 to 67% in 3QFY16. We had highlighted in our earlier reports that net gearing would likely double from 30% in end-FY15 to about 60%. 
• Higher working capital loans for its projects caused the rise in gearing, and resulted in the 69% increase in interest expense for the quarter. Beyond the earnings impact, we do not foresee any repayment issues. 
• Gearing is expected to decline in coming quarters as Triyards delivers its projects and receives cash payment.

STOCK IMPACT

Earnings impacted by non-start of US$175m liftboat order. 

• Triyards had previously secured a US$175m order for a pair of BH450 liftboats on 7 Jul 15. 
• We had earlier flagged that this order’s delivery was likely delayed to 1H18, but this has since stretched into 2H18, owing to design variations. The project is now slated to start earliest by 2QFY17, vs our previous assumption for a 4QFY16 start. 
• The earnings deferral is significant - our FY16/FY17 earnings have been reduced by 11%/27% as a result.

Lack of contract wins reflects challenging environment. 

• While Triyards is executing well operationally, the challenging environment has impacted demand for new vessels and fabrication projects. 
• Management commented that while client interest exists, the subdued oil price environment is giving pause to clients on inking new contracts. This is clearly reflected in the weaker contract wins of US$255m currently, vs the previous period, which stood at US$500m. That said, we laud Triyards’ ability to secure diversified contracts despite the severe downturn.

Expect lower margins going forward. 

• The diversification into other product classes did not come without a cost. Non-liftboat projects were secured at lower margins as compared with its liftboat projects. Gross profit margin is expected to trend lower at 18- 19% (from 22% previously) for coming quarters as it executes the lower-margin non- liftboat orderbook.

EARNINGS REVISION/RISK

Reducing FY16 capex assumption by 28%. 

• We had originally imputed a US$350m contract win assumption for FY16. With clients in no hurry to ink new orders, we foresee that new orders will likely be signed only after FY16. Our contract win assumption for 2016 is thus reduced by 28% as we remove the remaining contract win assumption of US$98m.

No change to contract wins assumptions for FY17-18. 

• Our contract win assumption remains unchanged at US$350m/US$400m for FY17/FY18 respectively. 
• We are likely to revise it downwards post their full-year results, where we will have greater clarity of the oil price environment.

Slashing FY16-18 earnings by 21-36%. 

• We are cutting our FY16-FY18 earnings by 21-36%. This is due to three factors: 
  1. removal of our residual 2016 capex assumption of US$98m, 
  2. shifting of aforementioned US$175m liftboat order to FY17, and 
  3. a 1.5ppt reduction in gross margin assumption. 
• A large part of the impact is due to the shift of the US$175m liftboat contract which alone impacted our earnings by 11-27%. 
• Our revised earnings forecast for FY16-18 are US$22m (-21%), US$27m (-36%) and US$24m (-25%) respectively.

VALUATION/RECOMMENDATION

Maintain HOLD, target price lowered to S$0.44. 

• Our target price has been lowered to S$0.44, due to the large earnings reduction for FY16 and FY17. Our valuation benchmark of 0.4x FY17F P/B represents the 1-year forward sector P/B for regional OSV shipyards. 
• While Triyards remains profitable and is executing well operationally, a blockbuster contract win in FY15 has not translated into higher earnings. 
• Furthermore, lower contract wins this year will likely result in flattish future earnings. 
• With the sector outlook remaining murky, and an earnings catalyst unlikely to materialise in the near term that will spur share price, we maintain our HOLD call. Entry price: S$0.35.

SHARE PRICE CATALYST

• Contract wins.
• Positive developments for parent Ezra.

Foo Zhiwei UOB Kay Hian | http://research.uobkayhian.com/ 2016-07-11

UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 0.44 Down 0.47