VALUATION
- 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. At the current share price, the company is trading at 14.5x 2013 PE, a 25.6% discount to its peer average of 19.5x.
- We also expect the company to pay out a dividend of 1.7 S cents/share providing investors with a dividend yield of 2.6%.
INVESTMENT HIGHLIGHTS
- Award of the RAPID contract will be later than expected. According to management, Petronas is still evaluating the tenders for the RAPID project but will probably announce the results only in 2H14, later than the 1Q14 as initially expected. As a recap, the Petronas RAPID project has a contract size of approximately US$700m-1b and will significantly bump up Rotary’s orderbook if they manage to secure it. In addition, the internal engineering and design department has already started work on the tank design and as a contingency plan, is able to offer their service to the main contractor if they fail to secure this project.
- Competition remains keen but Rotary will not compromise on margins. Gross margins in 2010 to 2013 were impacted by the SATORP project and company is likely to maintain its guidance of 10-12% for 2013. But as the company hands over this negative margin project to its client, the gross margin should recover and normalise to the 14-15% range. Further margin improvement can be achieved by increasing productivity and efficiency, lowering costs by shifting its production to its Indonesian yard and investing in barges to transport prefab components across the Straits.
- Positive on 2014. As revenue is progressively recognised over the 18-24 months’ project period, management is positive on the earnings outlook for this year. At the same time, the company will also be aggressively seeking new projects to replenish its orderbook. We conservatively expect the company to secure S$700m worth of order wins for this year, a tad below the S$1b secured in 2013.
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