Rotary Engineering - CIMB Research 2017-06-16: Rotating Back To Higher Order Backlog

ROTARY ENGINEERING LIMITED R07.SI

Rotary Engineering - Rotating Back To Higher Order Backlog

Rotary Engineering (RTRY) is an integrated engineering design, procurement, construction and maintenance (EPCM) company.
YTD, it has secured c.S$310m worth of contracts, above its average contract wins in FY14-16. At end-Mar 17, order backlog was S$435.9m (vs. S$152m at end-Dec 16).
It is currently trading at EV/order book of 0.4x vs. historical 5-year average of 0.6x.

RTRY is a full-fledged EPCM provider of bulk liquid storage solutions across the oil and gas, petrochemical and pharmaceutical industries. Its two core businesses are:
1. project services (PS), which carries out RTRY’s EPC projects, and
2. maintenance and trading (M&T).
Established in 1972; it was listed on the SGX Mainboard in 1993, and founder Mr Piow Chia Kim is still the chairman. Its main revenue-generating markets in FY16 were Singapore, the Middle East and Thailand.

Historically, the PS division formed the bulk of RTRY’s revenue and its main variable factor is order backlog. The M&T division’s revenue was fairly steady in the past at S$50m-65m p.a. since FY10.
In terms of gross margin (GPM), the PS division reported FY14-16 GPM of 16-24% (vs. FY12/13 lows of -31.6%/9.5% due to additional costs incurred at a tail end of a major Saudi Arabia contract), while the M&T division’s GPM historical average was 25-30% in FY12-16.

RTRY’s revenue run-rate declined to S$233.9m in FY16 from S$687m in FY14 and S$329.3m in FY15, largely due narrowing order backlog since FY14. Order book at end FY14/15 was S$204m/S$159m (vs. end-FY12: S$750m, end-FY13: S$694m).
Consequently, RTRY’s net profit fell to S$11.4m in FY16 (vs. FY14: S$50.1m, FY15: S$42.8m).

In Apr 17, RTRY announced three engineering procurement and construction (EPC) wins, comprising c.US$120m worth of tank storage projects in Dubai and Thailand, as well as S$140m worth of tank terminals projects in Jurong Port, Singapore. These wins were much larger than those announced in FY14-16 (S$25m-80m) and`brought RTRY’s order backlog to S$435.9m at end-Mar 17.
We note RTRY was the one Singapore-listed downstream player (others include PEC & Hiap Seng) to announce EPC contract wins YTD 17.

RTRY was still in a net cash position of S$47.1m at end-Mar 17, which translates into net cash per share of 8 Scts (23% of current share price). We note that the company still paid dividends in FY12/15/16 despite net profit decline in those years.
For FY16, it declared DPS of 0.5 Scts (vs. 1.5 Scts for FY15), which translates into dividend yield of 1.4%.

RTRY is now trading at 0.4x EV/order book vs. historical 5-year average of 0.6x. We note that its Apr announcement on the Jurong Port tank terminals win stated that the facility could accommodate another 230,000cbm of tank terminal space.
We also note that RTRY’s closest peer PEC Group Ltd’s (Non-Rated) 3Q16 results announcement stated that it received an increasing number of enquiries for both maintenance and project works; which may imply the downstream segment could see more activity moving ahead.

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-06-16

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