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Rotary Engineering’s 9M14 Net Earnings Rose More Than 100%
Corporate Digest, Featured | 19 November 2014
By: Tan Jia Hui
Articles (82) Profile

9M14 Earnings
Continuing its great performance in 1H14, Rotary Engineering recorded a 35.9 percent increase in revenue due to increased business activities from the execution of its current order book.

In line with the narrowed gross profit guidance given at the last results briefing (15 to 18 percent), the group reported gross profit margins of 16.9 percent and 16.8 percent for 3Q14 and 9M14 respectively (3Q13: 10.5 percent, 9M13: 12.1 percent), on the back of smooth execution of projects and improved productivity.

Consequently, 9M14 net profit more than doubled to $38.3 million.

Maiden Foray Into LNG Sector
In September, Rotary announced its breakthrough into the liquified natural gas (LNG) space with its first contract win to provide tankage works for LNG storage tanks at Map Ta Phut petrochemical hub in Rayong, Thailand.

Prior to this, the group has expressed its interest to enter the LNG scene at previous briefings.

Other than the partnership with IHI Corporation for the project in Thailand, group chairman Roger Chia also shared that there are other strategic partnerships, though no specific details were shared.

Through the strategic partnerships, Chia hopes that Rotary can gain enough experience and knowledge to move up the value chain in the provision of related services in the LNG space.

Apart from the group’s maiden foray into the LNG sector, Rotary is also finalising an investment deal in Indonesia, in an independent bulk storage terminal for petroleum products.

Low Oil Price Environment
A concern brought up at the results briefing was the current low oil price environment. With crude oil prices hitting four-year low in the past weeks, investors would naturally be concerned if it will affect demand for infrastructure and services in the oil industry.

In response, Chia shared that while the low oil price may affect oil producers, other players in the oil industry’s value chain may actually benefit. These include refineries, which may experience better margins from the low oil prices.

Such businesses could increase capital expenditure in such situation and Chia remains optimistic about the outlook on demand in the industry. Furthermore, as oil prices fall, certain production processes become cheaper, which also benefits the company.

Chia also sees more business opportunities in the Middle East due to the shifting dynamics of the oil industry resulting from the increased shale oil and gas output in the US. In the current environment, the group is of the view that Middle -East countries and their oil companies are likely to move up the value chain from the production of crude to become a global production and distribution hub for the oil industry.

Such a development would require more sophisticated storage and distribution infrastructures, which translates to potential projects for Rotary.

Rotary’s business unit in the Saudi Arabia is also undergoing a restructuring, overlooked by one of Chia’s younger brother who has experience working as a captain in Saudi Arabia. This comes after the completion of the SATORP project, which was shrouded by costs overruns in the construction phase, dragging down the group’s performance in FY13.

Addressing Concerns Of Depleting Order Book
At the 3Q14 results briefing, similar concerns about the replenishment of order book that was brought at the last briefing was again raised.

Between the last briefing and the most recent one, Rotary announced $80 million worth of new contracts secured. As of 11 November, the order book of the company stands at $303 million.

However, most of the major projects Rotary has at hand are in the final stages. With a large bulk of project slated for completion in 4Q14 as well as 1Q15, assuming no new contracts are awarded, its order book is likely to fall to approximately $100 million at the end of 1Q15 according to Chia.

Chia has noted that the securing of projects could be ‘lumpy’ sometimes, but stated that he was quietly confident of future project wins.

Rotary is also cautious when bidding for new projects due to the shortage of manpower, with tighter rules on foreign labour. Keeping a team of more than 7000 employees, Chia once again highlighted his confidence in the company, being able to sustain a relatively large work force.

Lastly, Chia also mentioned the strong net cash position of the group, which stands at $152.5 million. Other than distribution of dividends in the last quarter, the group sees the need to maintain a strong cash balance so that value creation can be attained through investment, transformation as well as mergers and acquisitions.

The current overhang for Rotary continues to be the lack of replenishment for its order book. However, notwithstanding concerns in securing new projects, Rotary is expected to record a strong performance in top and bottom lines for the financial year ending 31 December 2014 based on current momentum.

Armed with a bachelor in mathematics, Jia Hui keeps close tabs on the oil & gas, and manufacturing sectors in Singapore.

Please click here for more information about this author.

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