MUN SIONG ENGINEERING - Missing out on expectations (DMG)

NEUTRAL

Price S$0.159

Previous S$0.25

Target S$0.165

Mun Siong Engineering’s (MSE) 2Q11 earnings was below expectations (-59.5% YoY to S$2.2m), due to lower than estimated project revenue and gross margins. We cut our FY11 and FY12 earnings by 43.2% and 32.9% respectively, on lower revenue and gross margins estimates. On a positive note, MSE’s order book has grown and its focus on growing its maintenance revenue is bearing fruit, with maintenance revenue growth likely to be >50% YoY. In the absence of large EPC projects, maintenance jobs can mitigate the vacuum by providing a stable stream of recurring income. Moreover, MSE’s cash balance of S$18.1m also allows it to do earnings accretive acquisitions and the company has commenced casting its nets for overseas projects. Based on DCF methodology (WACC of 12.3% and 1% terminal growth rate), we derive a new TP of S$0.165, down from S$0.25 previously. Downgrade to NEUTRAL.

2Q11 results below expectations. MSE’s 2Q11 earnings came in at S$2.2m, down 59.5% YoY, largely attributable to a 15ppt decline in gross margins, with a variation order bumping up 2Q10’s gross profit.

Silver lining. MSE’s order books has grown 58% from S$13.8m last quarter to S$21.8m currently. With its strong financial position (net cash of 4.2S¢ per share), we believe MSE has the ability to do earnings accretive acquisitions if the opportunity arises.

Lower earnings estimates. On the back of a slower than expected rate of project wins (due to delays in projects roll-out) and lower than estimated gross margins achieved, we have reduced our revenue forecast by 12.2% to S$65m and lowered our gross margin to 20% from 25% in FY11. FY12’s projected revenue was also lowered 14.3% to S$78m and gross margin down to 20% from 21.4%. Consequently, our FY11 and FY12 earnings are lowered to S$6.9m (-43.2%) and S$8.7m (-32.9%) respectively.