Rotary Engineering

OCBC on 7 May 2012

Rotary Engineering (Rotary) reported a dismal set of 1Q12 results and this came in below our and the street’s expectations. Although net revenue increased by 2% YoY, profit attributable to shareholders fell by 41% to S$3.2m on lower gross margins (1Q12: 14%; 4Q11: 18%) and a steep foreign exchange loss of S$4.6m. On a positive note, Rotary’s net cash position has improved to S$46m as of end-Mar 12 (end-Dec 11: S$6m). We lowered our FY12-13F gross margin assumptions to 15-16% (previously 20%) and our P/B valuation peg to 1.2x (previously 1.3x). This in turn lowered our fair value estimate to S$0.61 (previously S$0.72). Maintain HOLD.

Dismal 1Q results
Rotary Engineering (Rotary) reported a dismal set of 1Q12 results and this came in below our and the street’s expectations. Although net revenue increased by 2% YoY to S$133m, profit attributable to shareholders fell by 41% to S$3.2m on lower gross margins (1Q12: 14%; 4Q11: 18%) and a steep foreign exchange loss of S$4.6m. On a positive note, Rotary’s net cash position has improved to S$46m as of end-Mar 12 (end-Dec 11: S$5m).

Margin pressure
Rotary explained that its gross margins dipped due to (i) additional cost incurred during the construction phase of the SATORP project and (ii) greater margin pressure due to stiffer competition. On the first point, management explained that it had incurred additional subcontracting costs to meet the stricter-than-expected regulations. The second point – stiffer competition – was unsurprising as oil companies push back their capital investments due to the global uncertainty. Looking ahead, we expect continued margin pressure over FY12-13F.

Foreign exchange loss of S$4.6m
The group suffered a foreign exchange loss of S$4.6m, arising from the weakening of the US dollar and an unexpected increase in net USD assets due to better billing and collection from SATORP. Given the magnitude of the losses, we feel that Rotary’s treasury management could have done better, for example, by tightening its hedging policies.

Maintain HOLD with lower fair value of S$0.61
Although Rotary is seeing intense business activity in enquiries and bids, its order-book has declined to S$597m as at end-Mar 12 (end-Dec 11: S$646m). We also fear that its Fujairah project could be further delayed due to engineering design variations. Therefore, we lowered our FY12-13F gross margin assumptions to 15-16% (previously 20%) and our P/B valuation peg to 1.2x (previously 1.3x). This in turn lowered our fair value estimate to S$0.61 (previously S$0.72). Maintain HOLD.