Rotary Eng Ltd BUY. Cost ini a ves showing results. LAST CLOSE: S$0.735 FAIR VALUE: S$0.830 (Previous: S$0.720)

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1 Thursday, 08 May 2014 Rotary Eng Ltd Cost ini a ves showing results BUY (Maintain) Ra onale for report: Results Update (Bloomberg: RTRY SP) Monday, 24 October 2011 LAST CLOSE: S$0.735 FAIR VALUE: S$0.830 (Previous: S$0.720) Financials YE Dec (S$m) F 2015F Revenue Gross Profit (110.1) PATMI (80.4) EPS (S cents) (14.2) DPS (S cents) PER (x) n.a Div Yield (%) Key Operating Statistics F 2015F Gross Margin (%) (24.8) PATMI Margin (%) (18.1) ROE (%) (41.7) ROA (%) (17.7) Net Gearing (%) Net Cash Net Cash Net Cash Net Cash Stock Data Issued Shares (m) Market Cap (S$m) Major Shareholders Chia Kim Piow* 35.06% Oman Investment Fund 21.38% Free Float 39.21% 52 week lo / hi $0.38 / $0.76 *Direct + Deemed interest 12-Month RTRY SP (Blue) vs. FSSTI Rotary announced a strong set of results for 1Q14, further affirming our thesis of a turnaround in its core business. The company recorded a 94% increase in revenue yoy to S$199.2m with corresponding PATMI at S$14.4m. 1Q14 earnings already accounted for 34% of our FY14 earnings forecast. The strong opera onal performance was due to excellent execu on of its ongoing projects as well as various produc vity measures that lead to be er margins. Rotary ended the quarter with S$535m worth of order book. Cost ini a ves result in be er project margins. Gross profit margin for 1Q14 was 17%, an improvement from 1Q13 gross profit margin of 15%. We believe that gross profit margins for FY14 can be sustained at 16% with management guidance at 12 18%. Net profit margin correspondingly also improved from 3.5% last year to 7.2% this quarter. The Man Year En tlement ( MYE ) restric on set by the government has resulted in depressed earnings for many labor intensive companies such as Rotary. However the company has managed to excel in a margins compressed environment through various produc vity measures such as work force training and streamlining of its logis c requirements etc to emerge ahead of the compe on. We applaud management s effort to value add and con nue on its innova ve path to increase overall produc vity of the group. Royston TAN roystontan@amfraser.com.sg Source: Bloomberg Order book thinning. Despite a strong set of results, a major concern will be the thinning of its order book from approximately S$694m at 31 Dec 13 to the current S$535m. If order book is not being sufficiently replenished in the coming months, the Rotary will not be able to sustain such strong earnings momentum ahead. However, management assured that various business development ac vi es are currently in ac ve engagement in places like Malaysia, Thailand and UAE. We expect new orders to be announced in the next 6 months with a key tender being the RAPID project in Malaysia that can increase its order book by a massive S$700m $1b if Rotary is successfully in its tender. Please see important disclosures at the end of this publica on

2 Taking up a stake through BOO opportuni es. Rotary has highlighted that the company will be interested to take up minority stakes in its EPC projects to showcase the confidence it has in the quality of its tankage work. This will increase recurring income through opera on and ownership of the storage tanks as well as set the stage for future maintenance work that is required. This will boost earnings from its maintenance segment, currently contribu ng 25% of the group s gross profitability. Maintain BUY with new FV at S$ We increase our earnings es mate for FY14 and FY15 by 11% and 4% respec vely, based on strong earnings momentum and our assump on that FY14 ends with an order book of S$700m to carry into FY15. Our valua on methodology is s ll based on 10X FY14 P/E which translates to a fair value of S$0.830 based on an improved earnings forecast. Together with a forecasted yield of 4.1% for the current year, total return is expected to be 17%. Maintain BUY. Fig 1: Rotary s 1Q14 vs 1Q13 P&L comparison Source: Company AmFraser Securi es Pte Ltd Page 2

3 YE 31 December INCOME STATEMENT (S$000) F 2015F Revenue 530, , , , ,203 Cost of sales (420,018) (554,517) (526,472) (657,421) (716,458) Gross (loss)/profit 110,851 (110,050) 68, , ,744 Other income 2,009 4,387 8,002 2,591 3,000 Selling and marke ng costs (2,317) (1,541) (1,191) (1,014) (2,500) Administra ve costs (50,834) (43,185) (50,302) (58,187) (64,740) Other opera ng costs (15,353) (26,568) (15,286) (12,901) (13,817) Finance costs (1,365) (2,643) (1,583) (813) (606) Share of results of associated companies (393) (2,345) (607) (Loss)/profit before tax 42,598 (181,945) 7,587 57,154 68,566 Income tax expense (5,397) (3,052) (12,262) (10,777) (13,713) (Loss)/profit for the year 37,201 (184,997) (4,675) 46,377 54,853 (loss)/profit to owners of the company 31,024 (80,441) 20,735 47,066 52,110 (loss)/profit to non controlling interests 6,177 (104,556) (25,410) (689) 2,743 37,201 (184,997) (4,675) 46,377 54,853 BALANCE SHEET (S$000) F 2015F Property, plant and equipment 77,838 61,051 53,730 49,742 47,665 Intangible assets 2,087 2,754 2,074 1,830 1,830 Other non current assets 22,132 16,120 13,994 14,929 16,499 Non current assets 102,057 79,925 69,798 66,502 65,994 Receivables and WIP 463, , , , ,057 Other current assets 17,713 8,223 19,453 20,534 23,589 Cash and cash equivalents 116, , , , ,926 Current assets 598, , , , ,572 Total assets 700, , , , ,566 Loans and borrowings 13,164 11,180 9,563 6,051 1,051 Other non current liabili es 2,642 2,345 1,795 Non current liabili es 15,806 13,525 11,358 6,051 1,051 Payables and WIP 258, , , , ,953 Loans and borrowings 97,829 72,039 50,202 34,239 29,239 Other current liabili es 17,787 21,486 74,668 65,619 65,619 Current liabili es 374, , , , ,811 Total Liabili es 390, , , , ,862 Net assets 310, ,512 98, , ,704 Total Equity 310, ,512 98, , ,704 AmFraser Securi es Pte Ltd Page 3

4 CASH FLOW STATEMENT (S$000) F 2015F Opera ng profit before tax 42,598 (181,945) 7,587 57,154 68,566 Deprecia on 14,491 14,767 13,516 12,071 12,436 Others 1,478 14,439 (90) 598 Change in working capital (99,263) 243,193 45,672 (15,783) (28,669) Interest and income tax paid (9,106) (6,788) (9,662) (8,989) (14,319) Net cash from opera ng ac vi es (49,802) 83,666 57,023 45,051 38,013 Capital expenditure (15,635) (5,641) (6,145) (8,058) (10,358) Others 3,074 7,276 7, Net cash used in inves ng ac vi es (12,561) 1, (8,041) (10,358) (Repayment)/proceeds from bank borrowings 72,367 (25,111) (25,410) (19,263) (10,000) Dividends paid (27,317) (13,039) (2,838) (17,026) (17,026) Others (184) (249) (38,543) (10) Net cash used in financing ac vi es 44,866 (38,399) (66,791) (36,299) (27,026) Increase/decrease in cash and cash equivalents (17,497) 46,902 (8,821) Effect of exchange rate (257) Beginning cash 134, , , , ,439 Ending cash 116, , , , ,069 KEY RATIOS F 2015F Profitability Gross margin (%) 20.9 (24.8) PATMI margin (%) 5.8 (18.1) ROA (%) 4.4 (17.7) ROE (%) 10.8 (41.7) Stability Gross Debt/Equity (%) Net Debt/Equity (%) Net Cash Net Cash Net Cash Net Cash Net Cash Per share data (SGD cents) NAV EPS 5.5 (14.2) FCF (11.5) DPS P/B (x) P/E (x) 10.5 (3.1) AmFraser Securi es Pte Ltd Page 4

5 AmFraser Research recommenda ons are based on a Total Return ra ng system, defined as follows: BUY: >15% total return over the next 12 months HOLD: 15% to +15% total return over the next 12 months SELL: < 15% total return over the next 12 months Disclaimer This report is prepared by AmFraser Securi es Pte Ltd ( AmFraser ), which is a holder of a capital markets services licence and an exempt financial adviser in Singapore. This report is provided for informa on only and is not an offer or a solicita on to deal in securi es or to enter into any legal rela ons, nor an advice or a recommenda on with respect to such securi es. This report is prepared for general circula on. It does not have regard to the specific investment objec ves, financial situa on and the par cular needs of any recipient hereof. You should independently evaluate par cular investments and consult an independent financial adviser before dealing in any securi es men oned in this report. This report is confiden al. This report may not be published, circulated, reproduced or distributed in whole or in part by any recipient of this report to any other person without the prior wri en consent of AmFraser. This report is not intended for distribu on, publica on to or use by any person in any jurisdic on outside Singapore or any other jurisdic on as AmFraser may determine in its absolute discre on, where the distribu on, publica on or use of this report would be contrary to applicable law or would subject AmFraser and its connected persons (as defined in the Financial Advisers Act, Chapter 110 of Singapore) to any registra on, licensing or other requirements within such jurisdic on. The informa on or views in the report ( Informa on ) has been obtained or derived from sources believed by AmFraser to be reliable. However, AmFraser makes no representa on as to the accuracy or completeness of such sources or the Informa on and AmFraser accepts no liability whatsoever for any loss or damage arising from the use of or reliance on the Informa on. AmFraser and its connected persons may have issued other reports expressing views different from the Informa on and all views expressed in all reports of AmFraser and its connected persons are subject to change without no ce. AmFraser reserves the right to act upon or use the Informa on at any me, including before its publica on herein. Except as otherwise indicated below, (1) AmFraser, its connected persons and its officers, employees and representa ves may, to the extent permi ed by law, transact with, perform or provide broking, underwri ng, corporate finance related or other services for or solicit business from, the subject corpora on(s) referred to in this report; (2) AmFraser, its connected persons and its officers, employees and representa ves may also, to the extent permi ed by law, transact with, perform or provide broking or other services for or solicit business from, other persons in respect of dealings in the securi es referred to in this report or other investments related thereto; and (3) the officers, employees and representa ves of AmFraser may also serve on the board of directors or in trustee posi ons with the subject corpora on(s) referred to in this report. (All of the foregoing is herea er referred to as the Subject Business.) However, as of the date of this report, neither AmFraser nor its representa ve(s) who produced this report (each a research analyst ), has any proprietary posi on or material interest in, and AmFraser does not make any market in, the securi es which are referred to in this report. Each research analyst of AmFraser who produced this report hereby cer fies that (1) the views expressed in this report accurately reflect his/her personal views about all of the subject corpora on(s) and securi es in this report; (2) the report was produced independently by him/her; (3) he/she does not carry out, whether for himself/herself or on behalf of AmFraser or any other person, any of the Subject Business involving any of the subject corpora on(s) or securi es referred to in this report; and (4) he/she has not received and will not receive any compensa on that is directly or indirectly related or linked to the recommenda ons or views expressed in this report or to any sales, trading, dealing or corporate finance advisory services or transac on in respect of the securi es in this report. However, the compensa on received by each such research analyst is based upon various factors, including AmFraser s total revenues, a por on of which are generated from AmFraser s business of dealing in securi es. Copyright AmFraser Securi es Pte Ltd. All rights reserved. LEE Wing How for AmFraser Securi es Pte Ltd AmFraser Securi es Pte Ltd Page 5