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

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.
  • Net cash per share position of 8 Scts (23% of Rotary's current share price).

An integrated EPCM company 

  • 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.

PS division was main revenue and gross margin engine historically 

  • 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.

Weaker FY16 financials largely due to lower order book 

  • 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).

Kickstarting FY17F with larger contracts wins 

  • 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.

Net cash position; Still paid dividends 

  • 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%.

Trading at 0.4x EV/order book 

  • 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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