Highlights

We attended Eversendai’s 1QFY13 briefing chaired by Group MD, Dato’ AK Nathan, and the management. Below are the key takeaways:

VOs in process… 1Q’s performance was not a fair depiction on Eversendai’s fundamentals. The softer earnings were due to delays in profit recognition as it is currently executing complex design structures in Qatar and Oman which is pending variation order (VO) approval. Hence, the VOs in the subsequent quarters will help lift Eversendai’s earnings.

Towards O&G… Eversendai has entered into a 25-year (option for another 25-year) land lease agreement for 200k sq m of land located in Ras Al Khaimah, Dubai, to setup their O&G fabrication facility. The land has a waterfront of 500m and sea depth of 7m during low tide. The land is leased for AED8m/year. Capex for Phase 1 will cost RM50m and is expected to be completed within 4-6 months. So far, Eversendai-Technics JV (70:30% stake) has tendered for 3 projects, collectively worth RM700m-RM800m. This is a positive development as it will allow Eversendai to realise its O&G venture and fuel earnings growth.

Technics investment… On the flipside, contribution from their 20% associate Technics will be weak this year. Despite this temporary setback, we believe that it is more important for Eversendai to leverage on Technics’ expertise to secure O&G-related contracts in the Middle East.

RM2bn milestone… The RM2bn revenue target by 2017 is still the management’s aim. Assuming that Eversendai retains its order book run rate of RM1-1.2bn, ventures in the CIS region can contribute RM300m annually, coupled with O&G topside structures which can easily fetch above RM500m, we believe that this target is achievable within 4.5 years’ time.

Earnings visibility… YTD, Eversendai has secured RM442.7m worth of contracts, making up 44% of our RM1bn order book replenishment assumption for FY13. Overall, Eversendai has an outstanding orderbook ~RM1.5bn, translating to 1.5x FY12’s revenue and 1.4x order book-tomarket cap ratio.

Risks

• Execution risk; Regulatory and political risk; Rising raw material prices; Unexpected downturn in the construction cycle; and Sharp fluctuation in forex.

Forecasts

FY13-14 earnings slashed by 3.9% and 3.1% respectively due to lower contribution from associate Technics.

Rating

BUY

• Despite the temporary shortfall in earnings growth, we favour Eversendai’s niche in complex structural steel works and prudent management. Hence, we are maintaining our BUY call in view of favourable long term prospects.

Valuation

• Due to lower forecasted earnings, TP trimmed by 3.8% to RM1.75 based on unchanged 10x average FY13-14 earnings.

Source: Hong Leong Investment Bank Research - 23 May 2013