Share Price S$0.64
Target Price S$0.88
Rotary Engineering (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.
• Earnings recovery on track. Rotary reported stronger results for 9M13. Net profit rebounded to S$16m from a loss in 9M12, mainly due to higher revenue and lower profit recognition from the negative-margin SATORP project. Total revenue rose 15% yoy to S$413.5m (9M12: S$360.1m) and gross profit improved to S$50.1m (9M12: S$87.6m gross loss). Management is confident that the SATORP project will be fully wound down and handed over by this year. Orderbook remained strong at S$847.0m as at 30 Sep 13, of which 67% came from Singapore and ASEAN and 33% from the Middle East.
• Mr Chia, Rotary’s Chairman, expects minimal earnings surprises as the size and nature of projects in the orderbook are similar to those Rotary has successfully delivered. Rotary is confident of delivering these projects safely, on time and on budget. Although the company expects costs to rise in the longer term, Rotary is looking to improve margins by increasing utilisation of the Batam yard for fabrication, streamlining procurement processes to save cost via bulk purchases, and setting up dormitories at the site to trim total
labour costs. We expect the company to record a net profit of S$24.0m and S$47.2m in 2013 and 2014 respectively, up from a loss of S$80.4m in 2012.
• Formidable cash balance to support consistent dividend payout. Rotary had a net cash of S$99m on its balance sheet as at 30 Sep 13 and has been paying dividends despite the loss in 2012. As earnings improve with the company clinching more contracts, we believe the company can resume paying higher dividends in 2013 and 2014. We estimate dividend yields of 2.6% and 5.2% respectively.
• Maintain BUY and target price of S$0.88, based on a 3-year average PE of 10.6x on 2014F EPS of 8.5 cents. This is at a steep 46.0% discount to peers’ average of 20x PE.
Publish date: 28/11/13