CIMB-GK Securities: Rotary Engineering - 27 Feb 2008

Exceptional margins; Exxon Mobil contract in the bag

• Below expectations. 4Q07 net profit of S$12.4m (+54% yoy) was 23% below our expectations but in line with market consensus (S$13.1m). FY07 net profit of S$52.8m (+50% yoy) was 7% below our full-year estimate but in line with consensus (S$53.7m). The shortfall was due to lower-than-expected order-book recognition, which has likely been pushed out to this year.
• 4Q07 sales declined 16% yoy to S$98.9m, as fewer projects reached peak recognition threshold than in 4Q06, when major milestones were reached for the Universal Terminal project.
• Exceptional margins. 4Q07 gross margins grew 200bp yoy to 41% while EBITDA margins jumped 800bp yoy to 20%. The leap came from back-end loading of final profit recognition for Universal Terminal. However, to be conservative, we are retaining our gross margin assumption of 21% and EBITDA margin of about 14% for FY08.
• Exxon Mobil expansion project finally awarded. YTD order book is at a record S$640m. Management indicated that the long-awaited Exxon Mobil project has been partially awarded but not disclosed due to commercial terms. We estimate the value of the contract at S$120m and expect more piecemeal awards to continue in the coming months.
• Middle East and Singapore growth markets. Rotary is eyeing at least two sizeable projects (above US$500m each) in the Middle East and a few storage tank contracts in Singapore. Our order assumption for 2008 remains at S$485m.
• Maintain Outperform and target price of S$1.44, still based on 12x CY09 EPS. Rotary proposed a final dividend of 2.3 Scts, bringing the total dividend to 4.6 Scts for a yield of 5%. We see positive newsflow from contract wins as catalysts for the stock. Upside potential could come from higher-than-expected margins. Valuations remain undemanding at 9x CY08 and 8x CY09 EPS, still at huge discounts to regional peers.

OCBC Research: Rotary Engineering - 27 Feb 2008

Still waiting more contract wins

Record FY07 results. Rotary Engineering (Rotary) posted a 16% drop in 4Q07 revenue to S$98.9m as a result of the completion of several major projects in 4Q06. At the net level, earnings rose 54% YoY to S$12.4m. This led to full year net earnings of S$52.8m, up 50%. Its overall performance was underpinned by buoyant demand for oil and gas downstream activities
in FY07, where revenue rose 17% to a record S$510.2m in FY07. However, as a prudent measure, Rotary made a provision for impairment loss of S$10.4m for its investments in two loss-making associated companies in China and Indonesia. Excluding these one-time provisions, Rotary's preprofit would have been S$81.9m, which is marginally higher than our expectations.

No surprises on the dividend payout. Rotary is proposing a one-tier final dividend of 2.3 cents per share, bringing a total dividend to 4.6 cents per share for the year. This translates to a dividend payout ratio of 49%. This is within the range of Rotary's dividend payout ratio of 38% to 50% historically. At yesterday's closing price of S$0.98, dividend yield works out to be 4.7%.

Review of contracts secured. We note that the sizeable contract order flow had not been as visible as earlier guided by the management. Based on our calculations, Rotary's contracts secured were S$203m in FY05, S$833m (including the S$535m Universal Terminal project) in FY06, and S$400m (our estimates) in FY07. Additionally, Rotary has clinched S$205m worth of contracts to date, bringing its order book to S$640m currently.

Lowering FY08 earnings forecast. Until we see further flow of orders in the coming months, we are paring back our revenue estimates for FY08 by 12.9% as order flow has been fairly slow for the last quarter of 2007. However, contract wins can be very lumpy for this industry and we do not discount the possibility of major contract wins in the coming months and this could trigger earnings and share price re-rating. We are increasing our PER multiple from 12x to 14x to take into account affirmation of Rotary's capability following completion of the Universal Terminal project. Pegged at 14x FY08 forecasted earnings, our fair value estimate is lowered to S$1.34 (from S$1.48 previously). As this represents an upside of 36.7%, we maintain our BUY rating.

CIMB-GK Securities: Rotary Engineering - 14 Feb 2008

Arabian knight

Saudi Arabian JV clinches US$62m contract
Rotary Engineering has increased its investment in its JV in Saudi Arabia, Petrol Steel, from SAR 2.5m to SAR 10m with a 51% stake. At the same time, Petrol Steel has clinched a US$62m contract from Saudi Kayan Petrochemical to build 24 tanks in Al-Jubail, Saudi Arabia. Completion is scheduled for end-2008.

Comments
Flexing its muscles in the Middle East. With a building cost of about US$8bn, Kayan Petrochemical is considered one of the largest standalone petrochemical complexes being built in the Middle East. We believe the contract attests to Rotary’s expanding track record in the Middle East.
More orders could be in the pipeline from the Middle East, on the back of heightened expansion in the refinery and petrochemical industries. We believe that Rotary is eyeing a few mega-sized projects (above US$500m). Contract wins are likely after the completion of its fabrication plant in the Jubail Industrial City by 2Q08. This had been delayed from 3Q07 due to a machinery shortage.
Still hopeful on Exxon Mobil contract. Rotary is still in the running for jobs (S$200m submitted) for the building of Exxon Mobil’s Singapore steam cracker in its US$4bn expansion plan.
Earnings estimates unchanged. We estimate current net order book at about S$350m and have assumed new contracts worth S$485m for 2008 (S$300m in 2007). Upside potential could come from any mega-deals in the Middle East.

Valuation and recommendation
Maintain Outperform but trimmed target price from S$1.80 to S$1.44, as we lower our target multiple from 15x to 12x CY09 P/E, in line with Rotary’s peers. More order wins and the successful execution of projects could provide catalysts for the stock. The company is scheduled to release FY07 results on 26 Feb and we expect full-year results to be in line, led by the final recognition of the Universal Terminal project.

OCBC Research: Rotary Engineering - 31 Jan 2008

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.

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%