PVS [OUTPERFORM +10.7%] - Soaring costs dampen M&C profit margin

- We maintain an OUTPERFORM rating and reiterate our optimistic view on PVS’s recovery that will start in 2023 as well as job opportunities from the Block B project and LNG/offshore wind power projects. PVS’s valuation looks attractive at a three-year PEG of 0.7, in our view.

- We cut our target price by ~6% as 1) we decrease our 2022F and aggregate 2023-2026F NPAT-MI by 20% and 7%, respectively, due to a lower projected margin for mechanics & construction (M&C) contracts and 2) raise our risk-free rate assumption by 50 bps.

- We forecast 2022F recurring EPS to decline 12.1% YoY as we expect a thinner profit margin for the M&C segment due to surging transportation, labor and material costs, a lower M&C warranty provision reversal and lower profit from the FPSO Ruby II due to a decreased day rate.