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Rotary Engineering Ltd: Ceasing coverage
 
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Rotary Engineering Ltd: Ceasing coverage

By Chia Jiunyang
Thu, 11 Apr 2013, 08:25:14 SGT

Rotary Engineering Ltd (Rotary) had a difficult year in 2012, as it battled escalating cost over-runs on its US$745m SATORP mega-project and repeated delays on its S$260m Fujairah Oil Terminal project. In 4Q12, the group appeared to be making progress on its SATORP project, although the non-controlling deficit is still a thorny issue. The group recently secured S$42m of project work in Singapore’s Jurong Island, and S$300m of EPC work in Pulau Busing. However, the tighter foreign labour market in Singapore could mean lower project margins over the medium term horizon. Coupled with the uncertainty at its SATORP JV, it may still be too early for investors to buy its shares, which are currently trading at 1.4x PBR. Meanwhile due to a reallocation of resources, we have decided to CEASE COVERAGE.

Is there a turnaround soon?
Rotary Engineering Ltd (Rotary) had a difficult year in 2012, as it battled escalating cost over-runs on its US$745m SATORP mega-project and repeated delays on its S$260m Fujairah Oil Terminal project. In 4Q12, the group appeared to be making progress on its SATORP project, although the non-controlling deficit is still a thorny issue. The group recently secured S$42m of project work in Singapore’s Jurong Island, and S$300m of EPC work in Pulau Busing. However, the tighter foreign labour market in Singapore could mean lower project margins over the medium term horizon.

SATORP JV deficit a thorny issue
As a brief recap, Rotary encountered several issues on its SATORP in-kingdom project, including design flaws, escalating costs and substantial re-work. After two quarters of steep cost over-runs, it now aims to achieve project commissioning by Oct-2013. However, the financial deficit at its 51%-owned SATORP JV is still unresolved. Rotary’s non-controlling interest showed S$82m of deficit as of Dec-2012. In our view, if Rotary decides to continue participating in projects in Saudi Arabia under the same operating entity, the JV would need a capital injection. Alternatively, if the JV is no longer relevant after the SATORP project ends, there is a risk of an impairment for the deficit amount owed by its minority JV partner.

Tight labour market in Singapore
Another concern is the tight labour market in Singapore, which accounts for 50% of Rotary’s order-book. While there is no change in the dependency ratio (for the construction sector), the increase in worker levies and reduced man-year entitlements would likely to lead to lower margins. Coupled with the uncertainty at its SATORP JV, it may still be too early for investors to buy its shares, which are currently trading at 1.4x PBR. Meanwhile due to a reallocation of resources, we have decided to CEASE COVERAGE.

 
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