Mun Siong Engineering: No surprises (OSKDMG)

(NEUTRAL, S$0.107, TP S$0.118)

Mun Siong Engineering’s (MSE) 3Q11 earnings was within our expectations (+3.1% YoY to S$1.9m), largely due to higher project and maintenance revenue (+16.6% YoY). With 9M11 earnings making up 73.2% of our FY11 estimates, we are maintaining our FY11 and FY12 earnings forecasts. MSE’s 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$17.1m also allows it to do earnings accretive acquisitions and the company has commenced casting its nets for overseas projects in Vietnam and Saudi Arabia. We have updated our inputs for our valuation model to better reflect the current market environment. Based on DCF methodology (WACC of 17.9% and 1% terminal growth rate), we derive a new TP of S$0.118, down from S$0.165 previously. Maintain NEUTRAL.

3Q11 results in line. MSE’s 3Q11 earnings came in at S$1.9m, up 3.1% YoY, largely attributable to a 16.6% YoY hike in revenue and a 3ppt increase in gross margins, but partially offset by higher administrative expenses. 3Q11 revenue came in at S$19m on the back of increased maintenance and project activities.

Silver lining. With MSE’s strong financial position (net cash of 3.8S¢ per share), we believe MSE has the ability to pay out a dividend of 0.5S¢ per share to shareholders, which translates to a decent yield of 4.7%. MSE is also in a position to conduct earnings accretive acquisitions if the opportunity arises.

Growing maintenance earnings base. MSE’s focus on growing its recurring maintenance revenue is paying off, with maintenance revenue expected to grow >50% YoY. We estimate FY11 earnings to come in at S$6.9m, all of which is attributable to maintenance revenue. In times when multi-billion dollar construction projects are scarce, MSE’s maintenance projects would help mitigate the earnings vacuum. Maintain NEUTRAL with a lower TP of S$0.118 based on DCF methodology (WACC of 17.9% and 1% terminal growth rate).espectively.