Triyards Holdings - UOB Kay Hian 2016-09-13: 4QFY16 Results Preview ~ Lower Earnings Expected, Recent Selldown Overdone; Upgrade To BUY

TRIYARDS HOLDINGS LIMITED RC5.SI

Triyards Holdings (ETL SP) - 4QFY16 Results Preview: Lower Earnings Expected, Recent Selldown Overdone; Upgrade To BUY

We expect a 14% decline in 4QFY16 net profit owing to a greater mix of lower-margin projects.
Balance sheet is also expected to improve significantly on the delivery of its Swissco unit.
Despite continued profitability, Triyards was impacted by the recent Swiber sell-off. Current levels represent a buying opportunity, given it is incorrectly trading at levels accorded to more troubled OSV companies.

We expect Triyards to report a 14% yoy decline in 4QFY16 earnings, with FY16 core earnings to show a 3% yoy decline.
The lower earnings in 4QFY16 is likely to have been due to a greater mix (~38%) of lower-margin projects (escort tugs and research vessels), as compared with 4QFY15 which saw over 90% of earnings arise from higher-margin liftboats.
For FY16, a mix of lower-margin projects and one-off tender costs in Taiwan from 3QFY16 should be the key reasons for the expected earnings decline.

Triyards successfully delivered Swissco’s liftboat unit, Jinshan 1, in 4QFY16.
We expect a large cash inflow and substantial reduction in project debt from its delivery, owing to its payment terms.
Net gearing of 67% in 3QFY16 is expected to decline significantly.

Triyards has successfully diversified and remained profitable despite a deep downturn. Lower margins from projects outside of its core product lines are only natural, and an earnings decline should be expected.
Despite their success in staying profitable and maintaining a healthy balance sheet, Triyards’ efforts remain unrecognised when the company is compared against peers who are either barely profitable or suffer from a highly leveraged balance sheet.

We have recalibrated our orderbook recognition post a meeting with management. Our estimates have been tweaked up slightly due to a shift in revenue recognition and revised gross margins for its projects. Our revised FY16-18 earnings are at US$23m (+3%), US$28m (+3%) and US$24m (+1%) respectively.

Recall that Triyards secured a US$175m contract in Aug 15 for two BH450 liftboats. The orders were for undisclosed Asian clients, introduced by Ezion. These form close to 36% of Triayrds’ 3QFY16 net orderbook of US$482m. Based on our understanding, the delays were due to continued design modifications. Management is hopeful that the project will start by end- 16 (2QFY17).
We have factored a ~45% earnings recognition into our FY17 earnings forecast from this project, but we believe the schedule faces slippage risks. Note that should the project be deferred completely to FY18, our FY17 earnings forecast can decline by as much as 46%. Our target price will fall from S$0.44 to S$0.42.

Our target price is benchmarked to 0.4x FY17F P/B, representing the benchmark accorded to Singapore OSV companies that have minimal balance sheet issues.
Triyards' current trading levels of 0.3x 1-year forward P/B and 2.6x 1-year forward PE represent valuations accorded to companies that are either barely profitable or have balance sheet issues.
Triyards faces neither, and remains on track to perform operationally. A buying opportunity exists.
Upgrade to BUY. Our target price implies a 52% upside.

Parent group Ezra’s financial state leaves an overhang on Triyards’ share price.
While Ezra’s financial problems are indeed deep, its partnership with the Japanese, continued support by the banks and sizeable orderbook backlog should allow it to weather the storm in the short term.

Foo Zhiwei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-09-13

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