In the running for more projects
Universal Terminal project fully completed. We met the management of Rotary Engineering (Rotary) for an update. The S$535m Universal Terminal project - the first independent oil terminal in this region with berths for two Very Large Crude Carriers (VLCC) - has been fully completed, two months prior to schedule. This milestone achievement for Rotary to complete within schedule and budget affirms Rotary's capability to deliver higher-value contracts.
In the running for several contracts. We note that the order flow for the past months had not been as visible as earlier guided by the management. However, we understand that Rotary is currently in the running for several sizeable (S$100m-S$300m) local projects, including Exxon Mobil's Singapore Parallel Train cracker project, Nexsol's biodiesel process plants, Stolt-Nielsen's tankers and terminals. In addition, we believe that potential contract flow from Middle East is likely to rev up. This is notwithstanding the piecemeal contracts that Rotary clinches occasionally. If these orders flow in, Rotary's orderbook is likely to reach a record in 2008.
Record earnings expected for 2007. With the updated status on the completion of UT project, we expect Rotary to recognize the remaining UT contract value in 2007. We are also factoring revenue recognition (commencing 1Q08) from Rotary's contract clinches amounting to a total of S$200m in our assumptions. As such, we are raising our earnings forecasts from S$46.7m to S$61.2m for FY07 and from S$54.5m to S$69.7m for FY08.
Universal Terminal project fully completed. We met the management of Rotary Engineering (Rotary) for an update. The S$535m Universal Terminal project - the first independent oil terminal in this region with berths for two Very Large Crude Carriers (VLCC) - has been fully completed, two months prior to schedule. This milestone achievement for Rotary to complete within schedule and budget affirms Rotary's capability to deliver higher-value contracts.
In the running for several contracts. We note that the order flow for the past months had not been as visible as earlier guided by the management. However, we understand that Rotary is currently in the running for several sizeable (S$100m-S$300m) local projects, including Exxon Mobil's Singapore Parallel Train cracker project, Nexsol's biodiesel process plants, Stolt-Nielsen's tankers and terminals. In addition, we believe that potential contract flow from Middle East is likely to rev up. This is notwithstanding the piecemeal contracts that Rotary clinches occasionally. If these orders flow in, Rotary's orderbook is likely to reach a record in 2008.
Record earnings expected for 2007. With the updated status on the completion of UT project, we expect Rotary to recognize the remaining UT contract value in 2007. We are also factoring revenue recognition (commencing 1Q08) from Rotary's contract clinches amounting to a total of S$200m in our assumptions. As such, we are raising our earnings forecasts from S$46.7m to S$61.2m for FY07 and from S$54.5m to S$69.7m for FY08.
Attractive dividend yield play. Rotary's dividend payout ratio has ranged from 38% to 50% historically. Management guided that the dividend payout rate for 2007 would mirror the historical trend. We are assuming a 50% payout ratio, yielding a total dividend of 5.4 S cents per share (inclusive of 2.3 S cents per share interim dividend). The recent market weakness has resulted in a fall in Rotary's share price making Rotary an attractive dividend yield stock at 6.3%.
Lowering valuation parameter given market outlook. Given the current market weakness, valuations have come off sharply across the board. Against this backdrop, we are lowering our valuation parameter from PER 18x to 12x. Based on 12x FY08 forecasted earnings, we are trimming our fair value estimate to S$1.48 (from S$1.60 previously) pending the announcement of more contract wins in the coming months. Maintain BUY.
Major Shareholder: Wong Family 21.4%
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