OCBC on 25 Sept 2012
Rotary Engineering Ltd (Rotary) issued a profit warning of net losses for the coming quarter and FY12F. According to management, losses were mainly due to the SATORP project. This should not come as a total surprise as Rotary had previously reported that it faced “major challenges” in its execution and warned that “additional costs … will be incurred to rectify” certain issues. The group’s ability to manage the cost over-run issue may be limited given the shortage of subcontractors in Saudi Arabia market and the tight deadline for completion. We now project a net loss of S$2.5m in FY12F and a subsequent recovery in FY13F. We also lowered our P/B peg to 0.8x (previously 1.0x) and fair value estimate to S$0.43 (previously S$0.50). Downgrade to SELL.
Profit warning
Rotary Engineering Ltd (Rotary) announced yesterday that it expects to record net losses for the coming quarter and FY12, although no guidance was given on the quantum. According to the management, losses were mainly due to the SATORP project. This should not come as a total surprise as Rotary had previously reported that it faced “major challenges” in its execution and warned that “additional costs … will be incurred to rectify” certain issues.
Cost over-run at SATORP
As a brief recap, the group had reported cost over-run of S$46m relating to SATORP in 2Q12. As the losses were mainly incurred on its 51%-owned joint-venture, Rotary’s share of losses was effectively S$23m. The cost over-run situation stemmed from several inter-related issues. The original civil subcontractors responsible for the construction work were unable to cope with the schedule, and additional subcontractors had to be appointed at higher costs. There were also changes to engineering design that resulted in major civil re-work. In addition, piping and electrical and instrumentation activities were also affected due to work sequencing. The latest profit warning implies that these issues may have worsened. Indeed, work sequencing issues can be severe and delays along a project “critical path” can quickly cascade downwards resulting in multiple logjams.
The clock is ticking…
Rotary’s ability to manage the cost over-run issue may be limited given the shortage of subcontractors in Saudi Arabia market and the tight deadline for completion (Dec 2012). In addition, it may also need to inject more capital into the JV company. We now project a net loss of S$2.5m in FY12F and a subsequent recovery in FY13F. We also lowered our P/B peg to 0.8x (previously 1.0x) and fair value estimate to S$0.43 (previously S$0.50). Downgrade to SELL.
Rotary Engineering Ltd (Rotary) announced yesterday that it expects to record net losses for the coming quarter and FY12, although no guidance was given on the quantum. According to the management, losses were mainly due to the SATORP project. This should not come as a total surprise as Rotary had previously reported that it faced “major challenges” in its execution and warned that “additional costs … will be incurred to rectify” certain issues.
Cost over-run at SATORP
As a brief recap, the group had reported cost over-run of S$46m relating to SATORP in 2Q12. As the losses were mainly incurred on its 51%-owned joint-venture, Rotary’s share of losses was effectively S$23m. The cost over-run situation stemmed from several inter-related issues. The original civil subcontractors responsible for the construction work were unable to cope with the schedule, and additional subcontractors had to be appointed at higher costs. There were also changes to engineering design that resulted in major civil re-work. In addition, piping and electrical and instrumentation activities were also affected due to work sequencing. The latest profit warning implies that these issues may have worsened. Indeed, work sequencing issues can be severe and delays along a project “critical path” can quickly cascade downwards resulting in multiple logjams.
The clock is ticking…
Rotary’s ability to manage the cost over-run issue may be limited given the shortage of subcontractors in Saudi Arabia market and the tight deadline for completion (Dec 2012). In addition, it may also need to inject more capital into the JV company. We now project a net loss of S$2.5m in FY12F and a subsequent recovery in FY13F. We also lowered our P/B peg to 0.8x (previously 1.0x) and fair value estimate to S$0.43 (previously S$0.50). Downgrade to SELL.
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