Share Price S$0.590
Target Price S$0.880
Earnings Recovery Likely To Drive Share Price Higher
We initiate coverage with a BUY with a target price of S$0.88, representing a 49.1% upside. Rotary Engineering (Rotary) is one of the region’s leading oil and gas infrastructure service company, offering extensive engineering design, procurement, and construction (EPC) services to oil companies such as Shell, Chevron, Exxon Mobil and PetroChina. With a strong orderbook of S$1.0b, Rotary is likely to enjoy good earnings visibility over the next 24 months. Dividends are also likely to recover in 2013 and 2014 from a low of 0.5 S cents per share in 2012, providing a dividend yield of 2.6% and 5.6% respectively.
• Established track record. Rotary has a track record of more than 40 years in providing fully integrated engineering design, procurement, construction (EPC) and maintenance services to the oil and gas, petroleum and petrochemical industries. Rotary has a portfolio of projects spanning many countries including Malaysia, Indonesia, India, China, Australia, Singapore till as far as Saudi Arabia and United Arab Emirates. Rotary is currently ISO 9000, ISO 14000, OHSAS certified.
• Growing energy demands to drive capex on tank farms. According to the BP Energy outlook, global energy consumption in 2030 will be 36% higher than 2011 with 93% of the growth coming from the non-Organisation for Economic Co-operation and Development (OECD) countries and more than half of the growth will
be coming from India and China. China will remain the world’s largest energy consumer and become the world’s largest energy importer by 2030.
• Bottoming out; silver lining along the horizon. Rotary went through a rough patch in 2012 with the company reporting an S$80.4m loss attributable to shareholders in 2012, compared with the S$31.0m profit a year ago. This is largely due to a major cost overrun in the Saudi Aramco Total Refining and Petrochemical Company (SATORP) project that led to the recognition of negative gross margins. The company has since regained its footing having clinched several contract wins in 1H13, such as the S$300m oil terminal in Pulau Busing and a total of S$102m for a few projects on Jurong Island. As at 30 June, the company had an orderbook of S$1.0b to be completed within 18-24 months.
• We initiate coverage with BUY recommendation on Rotary with a target price of S$0.88, implying an upside of 49.1% from current price. We derived our target price using Rotary’s 2014F earnings of 8.3 S cents/share and its 3-year average of 10.6x. This is at a steep 42.7% discount to the peer group which is trading at 18.5x.
Publish date: 01/10/13