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Is Rotary Engineering On A Recovery Track?
Corporate Digest | 17 May 2013
By: Nicholas Tan
Articles (71) Profile

The year before was indeed a challenging one for Rotary Engineering, which was beset with troubles. Compared to its last peak at $1.29 in August 2009, the share has been on a downward trend and is currently hovering below $0.50. So how will the company perform for the year?

Rotary Engineering, a leading downstream oil and gas infrastructure service provider, recently announced its first quarter result for the year on 8 May. As such, Shares Investment decided to take a peek into how has the company performed so far for the year after a poor 2012 performance. It raked in losses for FY12 due to challenges encountered at the end of the construction phase for the US$745 million Saudi Aramco Total Refining and Petrochemical Company (SATORP) project, which led to cost overrun issues and gross margin erosion.

Within Expectations
Revenue for the quarter ended 31 March 2013 came in at $102.8 million, down 22.9 percent year-on-year, as the group’s new anchor projects have just commenced operations this quarter. However, if compared on a quarter-on-quarter basis (1Q13 versus 4Q12), revenue was commendably up 21.9 percent due to the start of two new major projects, namely the US$250 million contract with Concord Energy for the Fujairah Oil Terminal in the United Arab Emirates and the $300 million expansion of the oil terminal at Pulau Busing in Singapore announced at the start of the year.

Gross profit margin at 15.3 percent was in line with the 10 percent to 15 percent guidance range for FY13 provided by the company, though for 1Q13 it was on the high side because of recent projects closures. Peering into the future, Rotary expects to face some margin pressure but remains optimistic that margins will fall within its pre-determined parameters with its strong track record and reputation. For the SATORP project in Saudi Arabia, Rotary will continue to manage the issue and does not expect significant costs for the final stage – the project is expected to complete in the second half of 2013. Upon completion and handing over, Rotary will be obligated to perform maintenances for two years throughout the warranty period.

Though net profit was down 20.1 percent year-on-year, from a positive angle it returned to the black from a full year loss in FY12. This signals that issues at SATORP are currently under control. Following the lessons learnt from SATORP, Rotary’s chairman and managing director Chia Kim Piow expects the company to remain in Saudi Arabia for future projects and hopes that its previous experience in dealing with the SATORP case will benefit it in the future and also reap economies of scale. Commenting on the overall results, Chia said: “1Q13 results are within our expectations, and considering the uncertainties the global economy is facing, it is encouraging and showing signs of a turnaround.”

Table 1: Rotary’s 1Q13 Financial Performance Compared Y-o-Y & Q-o-Q

Source: Compiled from filings on the Singapore Exchange

Strong Financial Position And Order Book
On Rotary’s balance sheet, the most eye-catching item is probably its incremental net cash position, which is on an uptrend and has increased for the past five consecutive quarters. Net cash position as at 31 March 2013 stood at $118 million, as its cash and short-term deposits swelled mainly due to down-payments received from new projects and improved revenue collections. Net asset value for the quarter increased 2.6 percent quarter-on-quarter to $0.349 from $0.34 as at 31 December 2012, showing glimpse of recovery in the making.

As at 31 March 2013, its order book of $756 million remains at a historically high level, among which about half are from projects in Singapore. This is a significant shift in geographical mix from FY12 where approximately 75 percent of the company’s order book was derived from the Middle East region. The change was mainly due to five new projects in Singapore – the $300 million expansion project at Pulau Busing and an array of civil works, piping and tankage, EPC, and fabrication and installation of pipe racks for an international speciality chemical company on Jurong Island totalling $88 million. These projects had already started on 1Q13 and are expected to complete between 2H13 and 4Q14.

Though the financial factors show signs of a better outlook for Rotary, there are still some risk concerns, one of which is the tight labour market in Singapore that could result in lower project margins over the medium term horizon. According to OCBC Investment Research, while dependency ratio for the construction sector has not changed, the increase in worker levies and reduced man-year entitlements would likely lead to margins squeeze.

Business Developments
In the company’s press release statement, Chia highlighted that the prospects for the oil and gas industry are bright due to strong demand for energy from China, India and the ASEAN. “Rotary is staying busy, bidding for contracts in Singapore, around the region and the Middle East. We believe that we are on the right track to a start of a good year for Rotary,” he mentioned. Chia also expects that there are enough projects on hand at the moment to keep them busy for the year.

One country that Rotary sees potential opportunities is Oman, where the Omani government last year announced the largest outlay ever, a total of US$100 billion gross investment in the oil and gas sector over the next 10 years, to sustain oil and gas production in the country over the long-term. As part of its plans to expand the downstream oil operations in Oman, the government formed a joint venture with the United Arab Emirates to develop a refinery in the southern coastal town of Duqm. Upon completion, the refining processing capacity will be around 230,000 barrels per day.

Chia revealed that Rotary is in-the-process of registering a company in Oman within this month but the details are yet to be finalised. He added that the company pre-qualifies for the oil and gas projects expected to be dished out over the next decade in Oman and it will most likely be involved in some of the projects. Interestingly, from its recent 2012 annual report, we noted that among its top substantial shareholders was the Oman Investment Fund. Through its wholly-owned subsidiary Funderburk Asia-Pac Investments, the state-owned fund holds a deemed interest of 21.38 percent in Rotary as of 8 March 2013.

Closer to home, Chia is of the view that Singapore still wants to be a global oil storage hub, and this can be seen through the construction of the $890 million strategic oil storage facility in Jurong Rock Cavern, which started in 2009. He believes that demand for oil storage facilities in the region is likely to remain strong and sees a lot of prospects in Johor, even more so, after the completion of the Malaysian elections which will bring about some political stability in the country and this will potentially attract more oil and gas investment into Johor from international oil majors.

Well trained in aspects of finance and business, Nicholas oversees the finance and manufacturing sectors at Shares Investment.

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