Highlights

RM2bn milestone… Eversendai has set its eye to achieve RM2bn revenue by 2017. Assuming that it achieves a net margin of 10%, this will translate to earnings CAGR of 11.6%. Despite the order book replenishment hiccups over the past two years which has failed to meet expectations of RM1.5bn/year, we believe that the target is achievable and realistic given the investment in business development activities. The most obvious strategy will be through its 70% subsidiary, Eversendai-Technics, to penetrate into the O&G fabrication sector. The next step will be through its 49% associate, Vahana Construction S/B, to move up the value chain as a turnkey contractor, while the balance prospects will be expansion into green field countries i.e. CIS region.

Eversendai-Technics… By leveraging on Technics’ technical expertise coupled with Eversendai’s extensive relationship in the Middle East, we believe that it will be a successful partnership. The Ras Al Khaimah fabrication facility will be ready by year end and Eversendai has targeted O&G-related revenue of RM600m. We believe that this is achievable as a single topside structure can easily fetch above RM500m. So far, the JV as tendered for 3 projects, collectively worth RM700m-RM800m. However, we believe that its maiden O&G order will be a smallish size to start off with.

Vahana… Vahana will be the vehicle to tender for projects as a turnkey contractor. By virtue of its strategic shareholding in Vahana, Eversendai should be able to secure structural steel works instead of being at the mercy of other main contractors to secure the structural steel subcontract. We believe that the entity will be bidding for projects in Sri Lanka and may potentially contribute RM100m-300m worth of orders.

Busy with existing orders… While waiting for its business developments to bear fruits, Eversendai will still be occupied executing its ~RM1.5bn outstanding orderbook, which translates to 1.5x FY12’s revenue and 1.3x order book-tomarket cap ratio. YTD, the company has secured RM442.7m worth of contracts, making up 44% of our RM1bn order book replenishment assumption for FY13.

Risks

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

Forecasts

Unchanged.

Rating

BUY

Despite the shortfall in FY12 earnings growth, we continue to favour Eversendai’s niche in complex structural steel works and prudent management. We believe that the business development activities will yield positive results. Hence, we are maintaining our BUY call in view positive catalyst from potential O&G contract wins and structural steel works from its associate, Vahana.

Valuation

Maintain TP of RM1.75 based on unchanged 10x average FY13-14 earnings.

Source:Hong Leong Investment Bank Research - 17 Jun 2013