Acromec Limited - A Better FY17 Ahead After a Blip In FY16
- We believe FY17 (Sep) may be a brighter period for Acromec, and expect it to win more bigger-sized contracts in the next few months.
- Management has taken steps to address issues that dragged down its 2HFY16 results, ie the delay in the recognition of its variation orders and lower manpower productivity, which led to lower margins. Its manpower cost also rose, as it anticipated larger contract tenders that were further delayed.
- Due to its now-brighter outlook, we upgrade our call to BUY.
- Our DCF-based TP of SGD0.50 (from SGD0.78, 39% upside) implies 14x FY17F P/E.
Larger contract wins.
- We expect Acromec to make a strong return to the black in FY17. There is a high possibility of it winning several large contract tenders in the next few months.
- The company’s orderbook currently stands at SGD32m, which represents more than half our FY17F revenue.
- We expect the tenders of a few large projects worth SGD20m-80m to be available for bids in the next few months. We expect Acromec to aggressively tender for these projects, albeit at rates that imply narrower-than-usual margins – although they would still be earnings-accretive. Thus, we expect incoming potential larger contract wins in the next few months.
FY16 blip due to several factors.
- Acromec’s 2H16 results were mainly dragged down by the delay in the recognition of its variation orders and lower manpower productivity in two of its healthcare jobs – which led to a decrease in margins.
- In addition, its manpower cost surged, as it anticipated winning larger contract tenders – which have been delayed. However, management has already taken steps to address these issues. These include cost rationalisation as well as streamlining its process to achieve cost and operational optimisation. As such, we believe that FY16 was merely a blip and FY17F would be a better year ahead.
Better FY17F ahead – upgrade to BUY.
- Due to its newly upbeat outlook, we upgrade our call to a BUY, with a DCF-based TP of SGD0.50