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Stockwatch- Rotary Engineering (S'pore), OCBC 4 Aug 2006 report

The best is yet to come

Net profit jumped 5-fold in 1H06. Rotary Engineering (Rotary) booked in 150% YoY jump in revenue to S$202.1m in 1H06, while gross profit rose 81% YoY to S$31.7m. EBIT margin increased 4.5ppt YoY to 10.3% in 1H06, pushing operating profit by 345% YoY higher to S$20.8m. After delivering a consistent 60% net profit CAGR in the FY03-05 period, Rotary's net profit still managed to catapult 395% YoY to S$16.0m in 1H06, beating our estimate of S$14.9m.

Expect a stronger 2H06. Rotary is expected to deliver a stronger 2H06 due to the higher percentage completion recognition for major oil storage terminal projects in Jurong Island. We have raised our FY06 net profit forecast for Rotary by 12.9% to S$37.8m, due to a higher net profit margin estimate of 6.9% (vs. 6.1% previously). Our FY06 revenue projection is relatively unchanged at S$544.1m, supported by the great 267% HoH leap in Rotary's net order book to S$525m as of end June.

More contracts win in 2H06? Oil giant Shell has announced the setting up of its Shell Eastern Petrochemicals Complex on Pulau Bukom last Friday. This project will be kicked off in late 2006 with the construction of the ethylene cracker. In our opinion, given Rotary's illustrious track record on Jurong Island, it is likely to be one of the main contenders for a bite at part of this US$3b project. We note that Rotary is one of the leading providers of engineering, procurement and construction (EPC) and maintenance services on Jurong Island, and is also currently providing maintenance works for Shell's petroleum refinery on Pulau Bukom. Also,
Rotary will almost reach the halfway mark for the S$535m Universal Terminal project by end 2006, which should serve as a good resume on its capability to do mega sized EPC projects.

Significant price upside potential. We have raised our fair value estimate to S$0.88 (vs. S$0.745 previously), which gives a price upside potential of 45%. Our fair value is derived from the similar 2.2x P/B ratio and the switch to FY07 book value (vs. FY06 previously). We believe that this is reasonable due to closer proximity to the Universal Terminal project completion date in FY07, and Rotary's flawless execution of this mega contract year-todate in 2006. The implied forward PERs are 9.4x in FY06 and 11.3x in FY07. On the back of Rotary's proven project execution capability and the strong outlook for Singapore's Chemicals Industry Cluster, we reiterate our BUY rating on Rotary.

posted by gsg @ 11:34 PM