By Lee Wen Ching
Fri, 26 Feb 2010, 10:01:33 SGT

Rotary Engineering’s (Rotary) FY09 performance exceeded expectations. Revenue grew 6.1% to S$551.9m, while net profit gained 6.7% to S$54.2m. Gross profit margin grew 1.7ppt to 31.1% and net profit margin swelled by 4.9ppt to 17.8% in 4Q09, surpassing our estimates, thanks to higher productivity and cost savings as several projects were completed during the quarter. The group’s order book remains robust at S$1.3b (vs. S$1.36b as of 3Q09) with visibility stretching till 2013, buoyed mainly by its landmark S$1.1b SATORP project. Rotary remains active in pursuing more projects in Asia and the Middle East, and any news of contract wins could serve as near-term catalysts for the stock. We have raised our earnings projections and lift our valuation peg to 14x (from 13x) in view of the improving outlook, deriving a fair value estimate of S$1.44 (previously $1.37). Maintain BUY.

4Q09 surpasses expectations. Rotary Engineering (Rotary) delivered a good set of 4Q09 results. The group reported revenue of S$147.0m (down 1.6% YoY but up 35.2% QoQ), gross profit of S$45.7m (up 3.9% YoY and 65.7% QoQ) and net profit of S$26.2m (up 36.0% YoY and 143.9% QoQ). For the full year, revenue improved 6.1% to S$551.9m, while net profit gained 6.7% to S$54.2m, beating our forecast by 29%. If not for a non-recurring S$5.7m debt provision, net profit would have grown by a larger 17.9% to S$60.0m. A final dividend of 3.8 S cents has been declared, implying a yield of 3.8%.

Good 4Q09 margins, but guidance remains cautious. Rotary’s 4Q09 profit margins beat our estimates and management’s guidance on higher productivity and realisation of cost savings as several projects were completed during the quarter. Gross profit margin hit 31.1% (vs. 29.4% in 4Q08 and 25.4% in 3Q09); while net profit margin swelled to 17.8% (vs. 12.9% in 4Q08 and 9.9% in 3Q09). Despite achieving robust profit margins in 4Q09, management continued to guide for a cautious 18% - 20% gross profit margin in FY10, citing keen competition as well as lagged effect from lower-margin projects secured during the credit crunch, which may continue to weigh on the group’s earnings.

Earnings visibility buoyed by all-time high order book. The group’s order book remains robust at S$1.3b (vs. S$1.36b as of 3Q09) with visibility stretching till 2013, buoyed mainly by its landmark S$1.1b SATORP project. We understand that SATORP has been making good progress and started contributing to the group’s earnings in 4Q09. We expect SATORP to give its earnings a bigger boost from 2H10 onwards as the project goes into full swing. However, receivables days are expected to lengthen as collections may be slower due to red tape involved with the massive scale of the SATORP project. Nevertheless, management allayed concerns over potential bad debts associated with SATORP, alluding to low Saudi Arabian sovereign risk.

Maintain BUY. Tendering activity is likely to heat up as more projects come on stream along with the economic recovery. Rotary remains active in pursuing more projects in Asia and the Middle East, and any news of contract wins could serve as near-term catalysts for the stock. We have raised our earnings projections and lift our valuation peg to 14x (from 13x) in view of the improving outlook, deriving a fair value estimate of S$1.44 (previously $1.37). Maintain BUY.