gsg_stock discussion

Stockwatch- Rotary Engineering (S'pore) S$0.59

Rotary Engineering recently presented at a Citigroup small cap conference and last friday some conference participants visited its Jurong worksite. I believe it is in the right sector and will benefit from the short supply of terminal storage facilities for the next few years.

The risk is if Rotary is not able to continue to win contracts to continue its growth in its order book and also Rotary has not been institutionalised yet, i.e. shares are not in strong hands and it may not performed as well as we wish; currently only OCBC has a coverage on it, its fair value for Rotary is 88cts, but note it estimates a dip in profit in 2007 relative to 2006.

If Rotary can win enough contracts to continue to keep its growth momentum in its order book and as a result allow analysts to project a higher profit in 2007 and 2008 year on year, in my view, Rotary will be "discovered" then.

Here's an write up in a blog that I follow that talk abt the sector for yr reference:

http://hottrendswatch.blogspot.com/2006_07_01_hottrendswatch_archive.html

Extracts from The Edge Singapore 7 Aug 2006:

1. Rotary recently set up 2 joint ventures with the Rafid Group, a Saudi company that provides services to the oil and gas and petrochemical industries. Aided by Rafid Group, the company is hoping to make inroads into the Saudi Kingdom.

2. Representatives from Saudi Aramco, the national oil and gas company, recently visited Rotary's work sites in Jurong Island and pre-qualified Rotary within 48 hours.

3. According to management, the upswing in the industry is so strong that there are too many jobs chasing after too few service providers.

4. On Jan 4 2006, Rotary announced a contract worth $535 million to build an oil terminal in Jurong Island for Universal Terminal Pte Ltd- its biggest contract ever. Universal Terminal is a subsidiary of Singapore's biggest oil trader Hin Leong Trading and Chinese oil and gas giant PetroChina.

When completed in Oct 2007, Universal Terminal will be the single largest independently owned oil terminal in the world. All other storage terminals of this scale are owned by oil and gas multinationals like Shell and ExxonMobil.

The big independent terminal operators, include Vopak of the Netherlands and Oiltanking of Germany. These tanks are used to store products like crude oil, jet fuel and diesel.

5. Chairman and Managing Director, Chia Kim Piow, says, "I have gone through many cycles, maybe 4 or 5 times. And demand for terminals this time around is very strong."

As Chia sees it, the rapid development in India and China is making the difference. With more exploration and production taking place in and around these countries, the need for storage will rise in tandem. Also, China is intently building up its strategic stockpiles of oil, adding to the demand for storage facilities.

Moreover, to reach less developed interior areas and communities, China and India are building smaller tanks and infrastructure inland. So the nest step for Rotary is to start building depots. These depots or smaller storage tanks will be connected to larger terminals by rail or pipeline.

6. With the surge of investments in alternative fuels like biodiesel, such plant will need storage tanks and pipelines as well.

7. Further down, Rotary hopes to get into the offsite and utilities business. Refineries and petrochemical complexes typically have extensive networks of pipelines transporting fuel, gas, steam, water and the like to and fro. Rotary is in talks to co-own these pipes, which will give it a lease income and throughput fee.

Citigroup, 24 Aug 2005 (Not Rated)

Corporate Day Takeaways: A Regional EPCM Specialist

 Business — Rotary is a provider of engineering, procurement, construction and maintenance services, supporting the oil and gas and petrochemical industries. Established in 1972, the group has a total workforce of 3,000 employees and has strong client base that includes companies such as Oiltanking, Vopak, Thai Tank Terminal, Hin Leong, BP and Tankstore to name a few.

 Key ratios and 1H06 results — Mkt cap S$237m. Consensus PER: 6.3x FY06E and 7.5x FY07E. 1HFY06 results: revenues up 150% yoy to S$202m, gross profits up 81% yoy to S$31.7m and net income up 395% yoy to S$16m. Net cash: S$47.9m. 1H06 revenue split: 84% Singapore (due largely to Universal Terminal), 11% China, 4% Thailand, and 1% Others.

 Record order book — Group order book as at 30 Jun 06 stands at a historical record of S$525m, the bulk of which comes from the construction of Universal Terminal, which is one of the largest independent oil terminals in the world. The new terminal will house 73 storage tanks for crude and petroleum products. PetroChina has invested US$160m to take a 35% stake in Universal Terminal.

 Prospects I — Management appears optimistic on the outlook. Strong growth in oil consumption for emerging Asia (accounting for 45% of total world increase) should drive the continued need for related facilities. The International Energy Agency estimates that oil consumption in Emerging Asia should more than double to 33.6m bbl/day by 2025 from 15.1m in 2002.

 Prospects II — According to management, there is strong growth potential in China for storage terminals as the government builds up the nation’s strategic stockpile of petroleum resources. In Singapore, tankage capacity is set to grow with storage for 41mbbls in the pipeline. This is up from 22m bbl of current storage capacity, which has been running at 90% for the past five years.

 Prospects III — Further, Shell and Exxon-Mobil are planning to invest in Singapore for two major petrochemical facilities. Management expects other supporting plants to be set up which could provide opportunities. Rotary is also optimistic on the Middle East and Thailand.

 Industry implications — Management said it has a 50-60% hit rate in Singapore for projects from multinational companies and independents. The group’s optimism reinforces our positive view on the offshore and marine industry.

Some recent company announcements/events by Rotary engineering:

21 Aug 2006- awarded a S$24mil contract by Nexsol (Singapore) Pte. Ltd, a subsidiary company of Peter Cremer (Singapore) GmBH for the Engineering, Procurement and Construction (EPC) of a biodiesel process plant and its related facilities on Jurong Island (the "Project") to produce biofuel and other downstream derivatives, targeted to be completed by end June 2007.

3 Aug 2006- post first half 2006 net profit of S$9.3mil, up 395% from previous year

8 May 2006- secures S$41mil contract for petroleum storage project (Oiltanking phase 7 involves construction of nine storage tanks, one jetty topside facilities, piping, civil, structural, equipment installation and electrical & instrumentation. It is scheduled for completion in December 2006.)

10 May 2006- incorporation of a 50/50 JV in Saudi Arabia, Petrol Steel Company Limited (Saudi Arabian parties named ABDUL AZIZ ABDUL MEHSON ABDUL WAHAB AL MANDIL(25%) and ADEL ABDUL MEHSON ABDUL WAHAB AL MANDIL (25%))

23 Feb 2006- post full year 2005 net profit of S$16mil, up 70% from previous year, 1 cts dividend less tax (up from 0.8ct previous year)

2 Feb- dispose its leasehold property located at No. 2, Gul Street 2, Singapore 629287 (the "Property") to its 70% owned subsidiary, Supermec Pte Ltd ("Supermec") at a cash consideration of $530,000 due to restructuring of businesses within the Group as well as expansion of business by Supermec

20 Jan 2006- entered into a Sale and Purchase Agreement ("the Agreement") to acquire the balance of the 50% equity interest in IMC Heavy Equipment Pte Ltd ("IMCH"), from its existing shareholder, Tiong Woon Crane & Transport Pte Ltd, for a consideration of S$521,843.8313 Jan 2006- disposed of the entire equity interests in Paper Dimension ("Disposal") to a non-related third party (the "Purchaser") on 13th January 2006, for the purpose of streamlining the Rotary's Group business

4 Jan 2006- awarded its biggest contract to date to build an oil storage terminal, worth S$535 million, in Jurong Island

22 Dec 2005- listing of associated company, TRC Construction Public Company Limited ("TRC"), TRC has officially commenced trading on the Stock Exchange of Thailand ("SET") on

22 December 2005 ("Listing"). Rotary's stake has been reduced from 37.5% to 30% as a result of the expanded paid up capital.

14 Dec 2005- entered into a Joint Venture Agreement with the Saudi Arabian parties namely ABDUL AZIZ A. AL MANDIL (20%), RIYADH AL NASSAR (10%) and AL TA'AFUF COMPANY FOR ELETRICAL WORKS (20%) and has incorporated a company in the Kingdom of Saudi Arabia known as Rotary Arabia Company Private Limited ("JVCO") on December 11, 2005 to pursue potential business opportunities and projects in the Kingdom of Saudi Arabia; will engage in the business of engineering and procurement services with primary focus in the electrical and instrumentation aspects supporting the oil and gas, petrochemical, water and waste treatment industries in Saudi Arabia.

5 Sep 2005- appointment of CFO Alex Goh

4 Aug 2005- post first half 2005 net profit of S$3.2mil, up 7% from previous year

Some useful news links:

http://www.iss-shipping.com/news/item.asp?niid=3280

posted by gsg @ 9:15 PM