UNDERPERFORM Downgraded
S$0.64 @24/08/11
Target: S$0.59
Oil & Gas - Equipment & Svs
• Factoring in delays in downstream energy investments. We have turned cautious on downstream order flows given macro uncertainties. With Rotary’s YTD slower-than-expected order intake of around S$70m, we now push back our order recognition to incorporate a weaker 1H12, although we are maintaining our order target of S$400m for FY11. We also lower our gross-margin assumptions for project services in FY13 to 20% (from 21%). As a result, our earnings estimates for FY12-13 have been cut by 6-16%, while our target price drops to S$0.59, now based on 7x CY12 P/E, 20% below the 5-year peer average (previously S$0.90, 9x CY12 P/E, 5-year peer average) to reflect weak sentiment on small-mid caps and heightened earnings risks. We also downgrade Rotary to Underperform, expecting de-rating catalysts from weaker-than-expected orders and results.
• Declining order book. Even with an annual order intake of S$400m, we expect Rotary’s order book to contract to S$450m by 2013 from a peak of S$1.3bn in 2009.
• Most expensive among downstream EPC players. Across various valuation metrics, Rotary is the most expensive among downstream EPC players. After our earnings downgrade, it is trading at 7.5x CY12 P/E vs. a current peer average of 6.8x. Excluding net cash, it is trading at 6.8x (though multiple could drop upon the collection of receivables) vs. the peer average of 3.7x. With comparable ROEs, the stock is also trading at 1.2x CY11 P/BV, the highest among peers. Such rich valuations could pose the biggest downside risks for the stock, in our view.
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