TRIYARDS HOLDINGS LIMITED
RC5.SI
Triyards Holdings (ETL SP) - 4QFY16: Preparing For A Better Future
- Triyards’ 4QFY16 earnings were significantly below expectations, mainly due to a 8.9ppt drop in gross margin.
- We expect lower gross margins of 15-17% going forward with lesser high-margin projects.
- While earnings will drop due to this project-mix diversification, the move strengthens its brand equity for the future.
- We cut net profit forecasts by 44-48% as we remove a US$175m liftboat order and lower contract win assumptions.
- Maintain BUY on valuations with a lower target price of S$0.41.
RESULTS
4QFY16 earnings below expectations on impairment and drop in gross margin.
- Triyards reported 4QFY16 net profit of US$2.2m, down 73% yoy.
- Full-year net profit was US$17.8m, and after excluding a one-off impairment charge of US$1.7m for its Houston facility, core net profit was US$19.5m, representing 86% of our full-year estimate.
- Also contributing to the lower earnings was a sharp 8.9ppt drop in gross margin to 12.9% (4QFY15: 21.8%).
Gross margin down on project mix and sub-contracting costs.
- The drop in gross margin was primarily attributed to the employment of sub-contract workers, which “impacted gross margin by as much as 5-10ppt”. A mix of lower-margin non-liftboat projects also contributed to the lower margin.
Net gearing fell to 60% as at end-FY16
- Net gearing fell to 60% as at end-FY16 (3QFY16: 67%), largely in line with our expectation of around 60%, owing to construction of the chemical tankers. The quarterly decline in gearing was largely due to the delivery of Swissco’s liftboat during the quarter, which registered a large inflow of cash upon delivery.
No dividend declared for FY16.
- Triyards did not declare any dividends for the year out of prudence. Management remarked that the decision was in no part caused by its shares being pledged to DBS and OCBC.
Secured US$27.6m in new orders.
- Three new orders were secured for the period:
- a service craft worth US$2m-3m,
- a fabrication job for a repeat client, and
- a floating dock for a Middle East client.
- We estimate 80% of this contract value will be recognised in FY17.
STOCK IMPACT
Sacrificing margins now for the future.
- Triyards is to be commended for successfully diversifying its product mix in the downturn, building up its expertise for the next up-cycle.
- Margin is expected to be sacrificed to break into new product classes. However, this is likely temporary pain as margins on the next project will be higher once Triyards demonstrates its ability to deliver its first project on schedule while maintaining quality standards.
Gross margin to remain low at 15-17% for 1-2 years.
- While this quarter’s lower gross margin was attributed to the use of sub-contract workers, our channel checks indicate that they have been employed for a few quarters. Therefore, we think the lower gross margin is more likely due to lower-margin projects attributed to its diversification bid.
- We expect overall gross margin to stay low at 15-17% for the next 1-2 years as a result.
Removing US$175m liftboat orders from estimates.
- A year has passed since the order was secured and the project remains in design phase. Only design fees have been charged for this project, which management guides as insignificant.
- We have removed its earnings impact to be conservative. Excluding these orders, net orderbook falls from US$422m to US$247m.
Interest cost to rise to 4.0-4.5%.
- Due to Singapore banks seeking to pare down their O&M exposure, Triyards is tapping on Vietnamese banks for project financing. This will increase its interest cost from 2.5-3.0% to 4.0-4.5%.
EARNINGS REVISION/RISK
Revising contract win assumptions to US$250m per year for FY17-19.
- In light of the weak contracting environment, we have lowered our contract win assumption to US$250m per year. This represents the minimum amount Triyards needs to win to keep its yards running.
- We cut our FY17-18 net profit estimates by 44% and 48% to US$16m and US$13m respectively due to three factors:
- lower gross margins of 15-17% (previously 18-19%),
- lower contract win assumptions, and
- removal of the US$175m liftboat order.
- We introduce FY19 net profit estimate at US$15m.
VALUATION/RECOMMENDATION
- Maintain BUY with a lower target price of S$0.41, benchmarked to 0.4x 1-year forward P/B, and as a result of our earnings downgrade.
- Despite having financial performance that is comparable (or better) relative to Vard (VARD SP/NOT RATED), Triyards trades at 1- year forward P/B of
SHARE PRICE CATALYST
- Positive developments for parent Ezra.
Foo Zhiwei
UOB Kay Hian
|
Andrew Chow CFA
UOB Kay Hian
|
http://research.uobkayhian.com/
2016-10-24
UOB Kay Hian
SGX Stock
Analyst Report
0.41
Down
0.440
