Share Price S$0.665
Target Price S$0.880
Strong Earnings Visibility Backed By S$1b Orderbook
The stock is currently trading at 7.9x 2014F PE despite gaining 11.9% since our recent initiation. 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/share in 2012, providing a dividend yield of 2.3% and 5.0% respectively. Maintain BUY. Target price: S$0.88.
• Takeaways from conference. We hosted Rotary Engineering at our UOB Kay Hian conference. This report highlights the key takeaways.
• Background on Rotary. Rotary provides fully integrated engineering design, procurement, construction and maintenance (EPCM) services to the oil & gas (O&G), petroleum, petrochemical and pharmaceutical industries. The group has projects in Malaysia, Thailand, Indonesia, India, China, Australia, Saudi Arabia and the United Arab Emirates. Some of the major projects Rotary has undertaken include the Universal Terminal in Singapore and SATORP JERP package 6 in Saudi Arabia.
• Chairman and MD Mr Chia remained confident on outlook. According to Mr Chia, there is still a strong pipeline of O&G projects in the region and UAE. Only recently, Petronas has called for a tender under Package 8 of the Refinery and Petrochemicals Integrated Development (RAPID) project in Johor, Malaysia. Rotary will be bidding for the project with four other contenders. Mr Chia estimates Rotary’s scope of work for the project is in the tune of US$700m-1b.
• Myanmar as the new frontier. Rotary will also be exploring projects in Myanmar. Currently, there are plans to develop more than 20 plots of land for the construction of terminals and tanker berths around the Thilawa Port and Rotary will be keen to participate in these EPC projects.
• Formidable cash balance to support consistent dividend payout. Rotary had S$164.5m cash as at 30 Jun 13 and the company has been paying dividends even when it reported a loss in 2012. As earnings improve with more contracts clinched, we believe the company can resume paying higher dividends. We estimate dividend yields at 2.3% and 5.0% in 2013 and 2014 respectively.
• We expect share price to be driven by improving earnings. Going forward, based on the contract wins to-date and the S$1b orderbook, we expect net profit to recover to S$21.5m and S$47.2m in 2013 and 2014 respectively. This will be a turnaround from the loss of S$80.4m in 2012, mainly due to the cost overrun in the SATORP project.
• Key risks. In our view, key risks that could impede the stock from reaching our target price include: a) delays or cost overruns in executing the EPC projects, and b) a prolonged economic slowdown which will affect the capex of oil companies and in turn affect the award of EPC contracts to contractors, such as Rotary.
• Maintain BUY and target price of S$0.88, based on a 3-year average PE of 10.6x on 2014F EPS of 8.3 S cents.
Publish date: 10/10/13