Highlights

We attended Eversendai’s 1HFY13 briefing chaired by Group MD, Tan Sri AK Nathan, and the management. Below are the key takeaways:

Owning up… Management was cognisant of the poor performance, whereby 1HFY13 revenue dipped by 3% to RM490.7m while earnings fell by a larger quantum of 36% to RM37.6m due to margin compression to 7.7% which is shy of its 11% PATAMI margin target. The shortfall in earnings was mainly attributed to the additional works for the Qatar National Museum project (RM216m) which was a challenging engineering feat.

Patience will be rewarded… Income will be boosted once it obtains the approvals for the variation orders (VO) arising from design changes for the Qatar National Museum project. Approvals for VOs are a delicate matter and require strong documentation and tactful negotiations. Given its successful track record in Middle East, we believe that the Eversendai will be able to successfully justify its additional claims.

Profit takes a breather… Hence, with the timing issue in profit recognition, management acknowledges a challenging 2HFY13 and only foresees earnings to rebound in 1HFY14 with margins recovering by year end or early FY14.

Final dividends instead... Decided to defer its semi-annual dividend to a final dividend payment. We believe that the payout should match last year’s 4 sen/share, translating to a payout ratio of 25.9% and yield of 2.7%.

New prospects… We are delighted to learn that its Vahana venture (49% associate) is close to securing a sizable contract while it is still in negotiations to secure a sizable project in Azerbaijan worth ~RM300m.

Earnings visibility… YTD, Eversendai has secured RM542.9m worth of contracts, making up 54.3% of our RM1bn FY13 order book replenishment assumption, Overall, the company has an outstanding orderbook of ~RM1.4bn, translating to 1.34x FY12’s revenue and 1.21x order bookto- market 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

Unchanged.

Rating

BUY

Despite the earnings disappointment, we take heart that the management is cognisant of its problems and is trying to resolve it. We are positive over Eversendai’s longer term prospects after getting its foot into the O&G industry and are undeterred by the short term negative earnings impact. We continue to favour Eversendai for its niche in complex structural steel works and prudent management. Hence, we are maintaining our BUY call on the company.

Valuation

Maintain TP of RM1.65 based on unchanged 10x average FY13-14 earnings.

Source:Hong Leong Investment Bank Research - 3 Sep 2013