Rotary Engineering Limited (Rotary) was hit by an unexpected S$46m cost over-run for its SATORP project, resulting in a 90% YoY fall in net profit attributable to shareholders to S$1.0m (2Q11: S$10.2m). Its original civil sub-contractors were not being able to cope with the SATORP schedule, leading to additional costs for hiring new subcontractors. Excluding the SATORP cost over-runs, management said that its gross margin will still be lower at 15% (2Q11: 21%) due to margin pressure from recent contracts. We factored in another quarter of cost over-run and cut our FY12F EPS by 40%. However, as the stock is already at depressed valuation (1x P/B, -1 SD below 5-year average), we maintain our HOLD rating with unchanged fair value estimate of S$0.50.
2Q results below expectations
Rotary Engineering Limited (Rotary) was hit by an unexpected S$46m cost over-run for its SATORP project, resulting in a gross loss of S$5.9m for 2Q12. As the losses occurred mainly on its 51%-owned joint venture company, Rotary’s 2Q12 net profit after deducting minority interest was S$1.0m, down 90% YoY from S$10.2m in the year-ago period. Excluding the SATORP cost over-runs, management said that its gross margin will still be lower at 15% (2Q11: 21%) due to margin pressure from recent contracts.
SATORP’s S$46m cost over-run
The S$46m cost over-run for the SATORP project resulted from several inter-related issues. The original civil subcontractors responsible for the construction work were unable to cope with the schedule and more 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. Rotary is currently rectifying the issues but gave no guidance on additional cost going forward.
Order-book running low
The group’s order-book is down 12% QoQ to S$527m as of Jun 2012 and will need to replenish its order-book urgently or risk a fall in operating efficiency. Its Fujairah project was again delayed by its client and the likely start date is now Sep/Oct 2012.
Depressed valuation, maintain HOLD
Given the shortage of subcontractors in the Saudi Arabia market and the tight deadline for SATORP (Dec 2012), Rotary’s ability to manage the cost over-run situation may be limited. Therefore, we factored in another quarter of weak results and cut our FY12F EPS by 40%. However, as the stock is already at depressed valuation (1x P/B, -1 SD below 5-year average), we maintain our HOLD rating with unchanged fair value estimate of S$0.50.
Rotary Engineering Limited (Rotary) was hit by an unexpected S$46m cost over-run for its SATORP project, resulting in a gross loss of S$5.9m for 2Q12. As the losses occurred mainly on its 51%-owned joint venture company, Rotary’s 2Q12 net profit after deducting minority interest was S$1.0m, down 90% YoY from S$10.2m in the year-ago period. Excluding the SATORP cost over-runs, management said that its gross margin will still be lower at 15% (2Q11: 21%) due to margin pressure from recent contracts.
SATORP’s S$46m cost over-run
The S$46m cost over-run for the SATORP project resulted from several inter-related issues. The original civil subcontractors responsible for the construction work were unable to cope with the schedule and more 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. Rotary is currently rectifying the issues but gave no guidance on additional cost going forward.
Order-book running low
The group’s order-book is down 12% QoQ to S$527m as of Jun 2012 and will need to replenish its order-book urgently or risk a fall in operating efficiency. Its Fujairah project was again delayed by its client and the likely start date is now Sep/Oct 2012.
Depressed valuation, maintain HOLD
Given the shortage of subcontractors in the Saudi Arabia market and the tight deadline for SATORP (Dec 2012), Rotary’s ability to manage the cost over-run situation may be limited. Therefore, we factored in another quarter of weak results and cut our FY12F EPS by 40%. However, as the stock is already at depressed valuation (1x P/B, -1 SD below 5-year average), we maintain our HOLD rating with unchanged fair value estimate of S$0.50.
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