Hiap Seng Engineering - Slower project recognition a drag (CIMB)

UNDERPERFORM Maintained

S$0.31 Target: S$0.24

Mkt.Cap: S$93m/US$76m

Oil & Gas - Equipment & Svs

• Below; maintain Underperform. 1QFY12 net earnings of S$2.5m (-69% yoy), accounting for 15% of our full-year numbers, was 40% below our expectations and consensus. The main culprit was lower turnover due to slower project revenue recognition. After adjusting our orderbook recognition schedule and factoring in lower margin assumptions, we reduce our earnings estimates for FY12-14 by 10-21%. Our target price is cut from S$0.43 to S$0.24, now based on 5x CY 12 P/E, one standard deviation below five-year peers’ average, to reflect weak sentiment on small-caps and macro uncertainties. (The previously target was based on 7.5x, 15% discount to five-year peers’ average). We are unimpressed by Hiap Seng’s lacklustre earnings growth and projected decline in ROE and thus keep our UNDERPERFORM rating. We see de-rating catalysts from lower-than-expected orders and further margin pressure.

• Slower project recognition a drag. 1Q revenue of S$40.8m fell 40% yoy due to the slower-than-expected ramp up in greenfield projects. While higher turnover is still expected in the subsequent quarters, we have moderated our recognition assumptions. The group yielded an encouraging gross margin of 19.5% due to highmargin shut-down maintenance jobs in 1Q. However, we think margins would decline with the higher contributions from projects in the coming quarters. Still, the company’s financial position remains strong as operations generated cash inflows of S$13.9m, bringing net cash to S$55.8m or S$0.18/share.

• New contracts but margins slim. The company’s order book stands at S$201m of which about 70% would be recognised in FY12. We estimate that Hiap Seng has secured around S$90m worth of orders YTD or 36% of our FY12 order expectation of S$250m vs. an estimated S$150m of jobs clinched in FY11. While the encouraging numbers have reaffirmed our belief that FY12 will see stronger momentum, margins for the new jobs may be slim and this could result in falling ROEs.