Acromec Limited - RHB Invest 2016-10-10: Potential Near-Term Headwinds Ahead

Acromec Limited - RHB Invest 2016-10-10: Potential Near-Term Headwinds Ahead ACROMEC LIMITED 43F.SI

Acromec Limited - Potential Near-Term Headwinds Ahead

  • Our channel checks reveal a slowdown in the issuance of Government tenders over the past few months, with most being delayed to 4Q16. 
  • In addition, with the potential entry of oil & gas engineering specialists competing for the same jobs in the healthcare space, we expect margins to compress, especially in 2H16. 
  • Due to near term headwinds, we reduce our NPAT for FY16F by 15%, and downgrade our call to NEUTRAL with a lower DCM-backed TP of SGD0.78 (from SGD0.92, 1% upside). 
  • We expect Acromec to continue winning projects in 4Q16/1Q17.


Tougher competition with potential new entrants. 

  • Due to lacklustre activities in the oil & gas space, many engineering specialist firms appear to have begun competing for public sector jobs in the healthcare space. This will likely lead to steeper competition in tender bids, and potential margin compression for the projects tendered. As a result, we expect Acromec Limited (Acromec) to be impacted, and project lower margins in 2H16.


Delays in public tenders towards 4Q16. 

  • Our channel checks reveal that there has been a slowdown in the issuance of Government tenders over the past few months, with most tenders being delayed to 4Q16. This is mainly due to the global macro slowdown, as well as the state of the local economy. 
  • We expect the local Government to continue to invest heavily in healthcare projects in Singapore, but with a delayed timeline.


Several big project tenders opening up soon. 

  • We expect several big projects, in the range of SGD40-100m to open up for tenders soon, with results for these tenders to be revealed by 1H17. 
  • Acromec has a proven track record with various Government organisations such as A-Star and National University of Singapore, which gives the company an advantage and underscores its creditability when tendering for these contracts. It also has the manpower and balance sheet to tender, as well as cope with large-sized projects.


Potential M&A activities. 

  • According to its prospectus, Acromec has set aside SGD1m for M&As. The company is also planning to grow its maintenance segment, which is its main recurring revenue stream. 
  • As a result, we believe its key M&A targets could potentially be companies providing maintenance works for the same industry and field, or downstream services for sub-contractors that it has close and good working relationships with.


Downgrade to NEUTRAL. 

  • Due to near term headwinds, we reduce our NPAT for FY16F by 15%, and downgrade our call to NEUTRAL with a lower DCM- backed TP of SGD0.78
  • However, we believe Acromec’s prospects remain bright especially in FY17F, with the key to success dependent on the outcome of tender bids for larger projects.




Jarick Seet RHB Invest | http://www.rhbinvest.com.sg/ 2016-10-10
RHB Invest SGX Stock Analyst Report NEUTRAL Downgrade BUY 0.78 Down 0.920



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