Tuesday 5 March 2013

Rotary Engineering

OCBC on 4 Mar 2013

Rotary Engineering Limited (Rotary) reported a second consecutive quarter of losses with 4Q12 net losses to shareholders of S$18.4m (3Q12: S$66m). Last quarter was marked by additional provisions made for its SATORP project and lower volume of work due to the late start of Fujairah Oil Terminal (FOT) project. FY12 revenue was down 16% to S$444m, while loss attributable to shareholders was S$80m, compared to profit of S$31m in the previous year. While the SATORP execution issues may be largely behind, the deficit at its JV remains unresolved. In a worst case scenario, Rotary – being the controlling shareholder – may need to take an impairment loss. Another concern is the tight labour market in Singapore, which represents about 50% of Rotary’s order-book. Maintain SELL with an unchanged S$0.34 fair value estimate.

Another loss-making quarter
Rotary Engineering Limited (Rotary) reported a second consecutive quarter of losses with 4Q12 net losses to shareholders of S$18.4m (3Q12: S$66m). Last quarter was marked by additional provisions made for its SATORP project and lower volume of work due to the late start of Fujairah Oil Terminal (FOT) project. FY12 revenue was down 16% to S$444m, while loss attributable to shareholders was S$80m, compared to profit of S$31m in the previous year. The group proposed a 0.5 S cent dividend for FY12. 

SATORP JV deficit remains unresolved
While SATORP execution issues appear to be largely resolved, the deficit at its JV remains a potential risk to shareholders. As a brief recap, Rotary had encountered several issues relating to its SATORP in-kingdom project, including design flaws, escalating costs and substantial re-work. After two quarters of steep cost over-run, it now expects to complete all the major works by Apr 13 and commissioning by Oct 13. However, the financial deficit at its 51%-owned SATORP JV is still unresolved. (Note: Rotary’s non-controlling interest showed S$82m of deficit as of end Dec-12.) In our view, if Rotary decides to continue participating in projects in Saudi Arabia under the same operating entity, the JV would need a capital injection. Alternatively, if the JV is no longer relevant after the SATORP project ends, there is a risk of an impairment loss for the deficit amount owed by its minority JV partner. 

Tight labour market in Singapore
Another concern is the tight labour market in Singapore, which represents about 50% of Rotary’s order-book. While there is no change in the dependency ratio (for the construction sector), the increase in worker levies and reduced man-year entitlements would likely depress project margins. Maintain SELL with an unchanged S$0.34 fair value estimate.

1 comment:

  1. i think your S$0.34 fair value estimate is very inaccurate. So far rotary never drops below $0.45. Pls do a re-evaluation- ocbc.

    ReplyDelete