SINGAPORE (June 19): CIMB likes Rotary Engineering, the integrated engineering design, procurement, construction and maintenance (EPCM) company.
In an unrated report on Monday, CIMB says things are looking up for Rotary Engineering.
In April, the company announced it had won three engineering, procurement and construction (EPC) contracts, comprising about US$120 million ($165.8 million) worth of tank storage projects in Dubai and Thailand, as well as $140 million worth of tank terminals projects in Jurong Port, Singapore.
“These wins were much larger than those announced in FY14-16 ($25-80 million) and brings Rotary Engineering’s order backlog to $435.9 million at end March,” says lead analyst Cezzane See.
See also notes that Rotary Engineering was the only Singapore-listed downstream company to announce EPC contract wins year to date.
Rotary Engineering 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 project services (PS), which carries out the group’s EPC projects, and maintenance and trading (M&T).
In FY16, its main revenue-generating markets were Singapore, the Middle East and Thailand.
Historically, the PS division formed the bulk of Rotary Engineering’s revenue and its main variable factor is order backlog. The M&T division’s revenue was fairly steady in the past at $50-65 million per annum since FY10.
In terms of gross profit margin, the PS division reported FY14-16 GPM of 16-24%, while the M&T division’s GPM historical average from FY12 to FY16 was 25-30%.
However, the company saw weaker FY16 revenue run-rate of $223.9 million from $687 million and $329.3 million in FY14 and FY15 respectively. This was due to a narrowing order backlog since FY14.
Consequently, Rotary Engineering’s net profit fell to $11.4 million in FY16 from $42.8 million in FY15 and $50.1 million in FY14.
At end-March 17, Rotary Engineering was still in a net cash position of $47.1 million, which translates into net cash per share of 8 cents, or 23% of current share price.
See says, “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 cents (vs. 1.5 cents for FY15), which translates into dividend yield of 1.4%.”
Rotary Engineering is now trading at 0.4x EV/order book versus historical five-year average of 0.6x.
See notes that PEC Group, Rotary Engineering’s closest peer, also received an increasing number of enquiries for both maintenance and project works in 3Q16, which implies the downstream segment could see more activity ahead.
Shares of Rotary Engineering are trading at 36 cents each.
