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.

First Resources - Expect strong 2H11 (DBSVickers)

BUY S$1.31

Price Target : S$ 1.70 (Prev S$ 1.75)

At a Glance

• 2Q11 net profit of US$36.7m (+258% y-o-y) slightly below expectations.

• CPO volumes +21% q-o-q offset by -8% in ASP. Interim dividend of S$0.01 declared.

• FY11-13F adjusted by -7.1% - +0.2% on revised FX and CPO prices, and lower refined volumes.

• Sales to pick up in 2H11. Buy call reiterated, TP of S$1.70 price.

Comment on Results

First Resources (FR) reported 2Q11 net profit of US$36.7m (+258% y-o-y and +20% q-o-q), slightly below our forecast on annualised basis, as the group has not yet deliver some of its presold inventory. This inventory included export-bound biodiesel, which has longer lead times for shipment. FR also achieved +11% q-o-q revenue growth to US$100.3m despite -8% fall in ASP due to 21% jump in CPO volumes. Net margins improved to 36.6% from 33.7% in 1Q11 as a result of superior oil extraction rates which stood at 23.9% (23.6% in 1Q11). 1H11 new plantings of 6,053ha are on track to achieve our FY11 estimate of 12k ha. Finally, investments in 3 new mills raised net gearing ratio (including MI) to 25% from 9% at end of Mar11. An interim dividend of S$0.01 was declared.

To account for a cut in refined volumes and slightly lower realized CPO ASP, FY11-13F earnings are adjusted by -7.1% - +0.2%. Longer-term, we also lowered FY13F-20F CPO prices (in MYR terms) by c.3%, and FX forecasts (in favour of stronger regional currencies). We also added biodiesel as part of refined product mix with ASP pegged to c.150% of Brent crude minus export tax.

Recommendation

FR is our preferred upstream planter, as 54% of trees are classified in the immature and young stage and should deliver 10.5% CAGR in FFB production (FY11-14) translating to 3-year EPS CAGR of 9.7%, despite a projected 20% fall in CPO prices over the coming year. With 2H seasonal uptick in volumes and margins, we reiterate our Buy call with TP of S$1.70 (revised down slightly from S$1.75 post earnings changes) implying 31% upside.

Ezra Holdings Ltd - Promise kept (CIMB)

OUTPERFORM Maintained

S$0.90 Target: S$1.55

Mkt.Cap: S$781m/US$650m

Offshore & Marine

New contract from Chevron Thailand

Ezra has bagged a new contract worth about US$300m for its AMC division, bringing its order book to US$600m. The contract could restore investors’ confidence after its recent 3Q11 earnings disappointment. No change to our earnings estimates as we have assumed new orders of US$500m-600m for AMC for 2011, for work to be carried out into 2012-13. However, our target price has been lowered to S$1.55 (from S$1.80), still SOP-based, after lowering our P/E target for its offshore & subsea business to 11x (5-year small-mid-cap industrial average) from 13x (20% above average) to reflect a general de-rating of the O&M sector. Notwithstanding this, we see catalysts from stronger-than-expected quarterly earnings and sizeable subsea contract wins.

The news

Ezra has secured a new contract of US$300m for its AMC division, bringing its order book to US$600m. The project scope includes the installation of wellhead platforms and associated pipelines in the Gulf of Thailand for Chevron. Work will begin early 2012 for three firm years with an option for another two.

Comments

Restoring confidence. The contract could possibly restore investors’ confidence after Ezra disappointed in its recent 3Q11 earnings. Given a strong tendering pipeline and upcoming deliveries of major subsea vessels (Lewek Falcon to be delivered by 4Q11; Aker Connector by early 12), management believes the group is on track to achieve its short-term order target of US$1bn. Lastly, we anticipate a better 4Q11 on the back of stronger project execution and better vessel optimisation.

Valuation and recommendation

Maintain Outperform; albeit with lower target price of S$1.55 (from S$1.80), still based on SOP. W lower our P/E target for its offshore & subsea business to 11x, now based on the 5-year small-mid-cap industrial average to reflect a general de-rating of the O&M sector (previously 13x, 20% above average). Notwithstanding this, we see catalysts from stronger-than-expected quarterly earnings and sizeable subsea contract wins.