ROTARY ENGINEERING

UOBKayhian on 8 May 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. At the current share price, the company is trading at 9.4x 2014 consensus PE, a 61.3% discount to its peer average of 24.3x. 
• We also expect the company to pay out a dividend of 2.9 S cents/share providing investors with a dividend yield of 3.9% for 2014.

FINANCIAL HIGHLIGHTS

• Rotary’s 1Q14 net profit rebounded to S$14.4m from S$2.5m in 1Q13, mainly due to higher revenue and improved gross profit margin. Total revenue rose 94% yoy to S$199.2m (1Q13: S$102.8m) as the company recognised revenue from ongoing project in Singapore and the Middle East. Gross profits grew 90% yoy to S$33.6m with gross profit margin improving to 17% (1Q13: 15%) due to increased productivity and reduction in costs.
• Orderbook fell to S$535m as at 31 Mar 14, of which 74% is from Singapore and the rest in Asean and Middle East. Balance sheet is also healthy with the company recording a net cash of S$147m, 35.2% of the current market cap.

OUR VIEW

• Although this quarter’s net profit exceeded expectations with higher revenue and improved gross profit margin, we maintain our earnings forecast for the year at S$40.8m due to a lack of contract wins for the first 4 months. Unless the company is able to win contracts soon, we are likely to see revenue peak in the next 6 months.
• Awarding of the Petrona’s Rapid project likely delayed. Petronas has recently approved the development of the Refinery and Petrochemical Integrated Development (RAPID), which will cost US$16b, and other associated facilities, which will cost US$11b. Although Rotary has already submitted a bid for one of the packages with a contract size of approximately US$700m-1b, management shared that the client has gone quiet so far and thus Rotary will be focusing on other projects in Malaysia instead.
• Outside of Asean. Rotary sees opportunities in the Saudi Arabia to focus on tankage, electrical and instrumental services and fabrication work as well as exploring other Build-Operate-Own opportunities.