PVS – Well equipped for new contract awards – Update

• 9M20 net profit was below, at 68.4% of our FY20F forecast, due to unexpected provision expense at PVS’s affiliate and higher minority interest.
• We lower FY20-22F EPS forecasts by 5.0-13.6% as we see slower-than-expected progress of its large domestic projects, e.g. Block B, Blue Whale.
• Reiterate Add at a higher TP of VND17,700 on DCF valuation rolling forward to 2021F and higher target P/E of 8.4x (previously 6.8x).

9M20 net profit slipped due to higher expenses and provisions

PetroVietnam Technical Services (PVS) posted an 8.5% yoy increase in net revenue in 9M20, mainly due to revenue recognition of its construction projects (Sao Vang and Gallaf Qatar) and higher yoy charter rate of Lam Son FPSO. However, net profit posted an 11.5% yoy decline, on top of: 1) a 1.6%-pt contraction in gross margin as the company incurred higher overheads across all segments, and 2) an est. VND270bn in provisioning expenses recorded at PVS’s FSO/FPSO joint ventures, leading to a 69.7% yoy drop in income from affiliates. 9M20 net profit made up only 68.4% of our FY20F forecast as 9M20 affiliate income was below expectation, mainly due to the VND150bn provisioning expense made in 3Q20 at Lam Son FPSO on risk of contract termination in 2021F.

We cut FY20-22F EPS forecasts by 5.0-13.6%

According to industry sources, Block B – O Mon project is facing challenges in terms of negotiation of commercial terms relating to gas sales, electricity sales, etc, which could lead to delays of first gas from 4Q23F to Sep 24 at the earliest. In addition, we observe that the tendering period for the pipeline projects has been extended several times to end-2020/early-2021 and risks being extended further. In that context, we shift the revenue recognition period of Block B to 2022F onwards, leading to a 15.9% decrease in FY21F revenue forecast. Besides, we also adjust our income from affiliate assumptions, taking into account one-off provision expenses of est. VND300bn for FPSO Lam Son in FY20F. This leads to 5.0-13.6% downward revision in our FY20-22F EPS forecasts.

Reiterate Add at a higher TP of VND17,700

We raise our TP from VND15,900 to VND17,700, as the effect from our lower FY21-22F EPS forecasts is outweighed by: 1) lower risk free rate of 3% (vs. 4% previously), 2) DCF valuation rolled forward to 2021F, and 3) higher target FY21-23F P/E at 8.4x, as we lift the 0.5 s.d. discount off its 5-yr mean P/E given the ongoing recovery in oil price. We reiterate Add as we believe PVS could be re-rated from winning potential projects, such as White Lion 2, Block B pipeline, LNG terminals, GPP Dinh Co 2 etc., in 2020-23F, given its healthy financial position and proven track record in project execution. Downside risks: further delays in project progress and additional provision expenses.

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