LAST CLOSE: S$0.585
FAIR VALUE: S$0.74
Rotating a turnaround
Initiate with Buy call and target price of S$0.74. Fair value based on 10X FY14 P/E. We see short term catalysts coming from stronger than expected order wins and significant improvement in margins. Current order book as of August 2013 stands at a robust S$1b. We expect the company to garner more orders with decent margins ahead.
Focus on EPC Tankage. The company is a market leader in Singapore when it comes to EPC of storage tanks. It has completed 50% of tankage works in Singapore such as the Universal Terminal and Oiltanking Merak projects. This is a critical differentiating factor that allows the company to stand out against its peers and bid for major tenders around the world.
Turnaround from SATORP losses. We believe that the worst is over and business is back on track. The SATORP project will attain financial closure in October 2013 and thereafter we expect a significant improvement in margins for FY2014.
Strong order book with good geographical diversification. Singapore accounts for 62% with Middle East at 34% and the remaining 4% attributable to ASEAN. The company is less reliant on a single geographical location as compared to the past and this reduces concentration risk substantially.
Industry fundamentals to improve ahead. We expect the mid and downstream segment where Rotary is operating to be a beneficiary of high oil prices. Changing economics with refinery operations shifting from the west to the east will also benefit the downstream segment of the oil and gas industry in this region.
Potential entry into ownership of storage tanks a game-changer. Rotary has been mooting the idea of taking up minority equity stakes in their projects. We believe this could be a very strong catalyst for long term stability and outperformance compared to its peers.
Valuation. We value the company at 10X FY14 P/E to obtain a fair value of S$0.74, representing a 27% upside from current level.
Publish date: 10/09/13