Acromec Limited - Stiff Competition Hurts Margins
- Acromec’s 1H17F results may be dragged down by the delay in the recognition of its variation orders and lower manpower productivity in a few of its major projects.
- In addition, the company continues to face margin pressures due to a stiff competition and cost pressures.
- We still expect Acromec to turn around in the future; however, with this bleaker outlook and challenges ahead, we currently lower our FY17F estimates by 43% and downgrade our call to NEUTRAL (from Buy) with a lower DCF-derived TP of SGD0.38 (from SGD0.50, a 20% downside), implying an 11x FY18F P/E.
Lower margins due to stiff competition and cost pressures.
- We expect Acromec to face margin pressures ahead, due to stiff competition as well as the carry over effect from the delay in the recognition of its variation orders and lower manpower productivity in a few of its major projects.
- The company is actively taking steps to streamline its processes so as to achieve cost and operational optimisation and will also continue to monitor its costs, amid a tight foreign labour market and stiff competition. Therefore, we expect near term downward pressures on margins for Acromec.
Decent orderbook to justify a turnaround...
- Acromec reported a SGD8.7m contract win in Feb 2017 with a new customer in the pharmaceutical industry for the fitting-out of production facilities in an extension project to an existing pharmaceutical plant to be completed by 3Q17. These facilities which spread 0.9 over three levels and connect to the main building facilities, will provide an 0.7 additional 1,680 sqm of space.
- As of Feb 2017, their orderbook stands at 0.5 SGD42m, which could be sufficient for a turnaround back to profitability in FY17F.
...due to potentially larger contract wins.
- We expect Acromec to make a return to black in FY17F.
- There is a decent possibility of it winning several large contract tenders in the next few months. The company’s orderbook currently stands at SGD42m, 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 within 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.
Near-term pressures; downgrade to NEUTRAL.
- With the bleaker outlook and challenges ahead on its margins, we lower our FY17F estimates by 43%, and downgrade our call to a NEUTRAL with a DCF-backed TP of SGD0.38 (from SGD0.50), implying an 11x FY18F P/E.
- Key Risks. Margins pressures and lower contract win rate.