ROTARY ENGINEERING

UOBKayhian on 28 Feb 2014

VALUATION

•  Maintain BUY and target price of S$0.88, based on a 3-year average PE of 10.6x on 2015F EPS of 8.3 S cents. We also expect the company to pay out a dividend of 2.9 S cents/share providing investors with a dividend yield of 4.6% for 2014.

FINANCIAL HIGHLIGHTS

•  Rotary reported a stronger set of results for 2013. Net profit rebounded to S$20.7m from a loss in 2012, mainly due to higher revenue and lower profit recognition from the negative-margin SATORP project. Total revenue rose 34% yoy to S$595m (2012: S$444m) and gross profit improved to S$68.5m (2012: S$110m gross loss). Gross profit margins also grew to 12% which was within management's guidance.
• Orderbook remained strong at S$694m as at 31 Dec 13, of which 69% is from Singapore and ASEAN and 31% from the Middle East. Balance sheet is also healthy with the company recording a net cash of S$134m, 37.5% of the current market cap. Rotary is also proposing a dividend of 1.5 S cents, providing investors a dividend yield of 2.4%.

OUR VIEW

•  Keeping a tight control on current projects. Rotary is confident of delivering a very strong set of results for 2014 as most contracts in the current orderbook are in Singapore, where control is tight and execution risks are a lot lower. Gross margins are also expected to normalise after the Group handed over the SATORP project last year. Rotary has also put in place several initiatives to improve productivity and reduce costs such as shifting its production to its Indonesian yard and investing in barges to transport prefab components across the Straits.
• Oil and gas projects outlook remains robust While Petronas is still evaluating the tenders for the RAPID project and will probably announce the results only in 2H14, Rotary re-iterated that there are also several projects out for tender in 2014 such asMalaysia’s petrochemical hub in Pahang, Thailand’s EPC, tankage project in Map Ta Phut and even Fujairah oil terminal phase 2. Chairman Mr Roger Chia urged investors to remain patient as contract wins will come.
• Earnings to double in 2014. Getting off a low base in 2013 and with the current orderbook of S$694m, we expect the company to record a revenue of S$700m and profit of S$40.8m, doubling from the last financial year.