• Revenue weaker by 13% YoY
• The corrosion prevention segment is benefitting from the improved sentiment in marine & offshore sector. The growth engines solar and modular are gaining traction.
• Maintain BUY with an unchanged target price of S$0.29.

The Positives

+ Improving sentiment in the marine & offshore sector. Revenue for corrosion prevention (CP) segment increased 6% to S$3.4m QoQ. The improvement in oil prices led to increased activity in the marine & offshore sector. The group witnessed more construction of new vessels, which resulted in more contracts being awarded. Utilisation of plant capacity improved which led gross margins to increase to 27% from 15.7% a year ago.

+ Growth engines Solar Energy & Modular gains traction. Revenue from the solar energy segment rose to S$1.8m in 2Q18 from S$0.15m in 2Q17, the increase is due to the delivery of delayed projects and new contracts secured in FY18. We expect the Bangladesh solar farm project to commission in 1H19.  Modular recorded higher revenue for the delivery of pre-fabricated bathroom units for the Lendlease Paya Lebar project. The group has also fully acquired TLC modular the subsidiary for the modular business.

The Negatives

–  Structural steel segment faced with margin compression. Revenue for the engineering & construction sank 49% YoY to S$3.2m from S$6.3m due to the structural steel segment. The segment is faced with margin compression from lackluster environment, cost overruns and a one-off revenue adjustment in 2Q18.

Outlook

We remain positive on the two growth drivers of the group solar energy & modular construction and expect significantly higher contributions in FY19. We expect order books to build up for modular construction. The Cosa hotel is on track to deliver the turnkey project in 2H18. We expect the structural steel segment to continue to face challenges from lackluster environment and margin compressions.

Maintain BUY with an unchanged target price of S$S0.29

We maintained our BUY recommendation with an unchanged target price of S$0.29. We have adjusted FY19e revenue downwards by 10% in light of the recent result, earnings unchanged as we expect margin expansion from CP and the growth engines.