Highlights

Below are the key takeaways from Eversendai’s 9MFY13 briefing, which was chaired by Group MD, Tan Sri AK Nathan:

Qatar woes… Management explained that additional costs were expensed off in 3QFY13 in view of the unfinalised variation orders (VO) for the Qatar National Museum project (contract value of RM216m), whereby approval has taken longer than expected to materialise. Compensation is already in advanced discussions and management is confident of reclaiming back the costs.

More concerned on India… Likewise, the same situation is faced for Worli Towers which has a contract sum of RM274m. We are not confident of Eversendai’s chances in compensation claims given the economic climate in India.

RM35m gone… Provisions for both projects have caused Eversendai RM35m in profits. Adjusted for it, 3Q core PATAMI would have been strong. The highest quarterly core PATAMI was RM34.6m in 4QFY12.

Uncertain 4Q… Going forward, we believe that 4Q is also uncertain as Eversendai may recognise further costs for additional variation orders while finalising the formal approval. Management believes that the issue should be resolved in FY14.

New wins lacking… YTD, Eversendai has only secured RM593m worth of jobs whereby new wins have been disappointing over the last 2 years (FY12: RM924m; FY11: RM1.1bn), failing to meet expectations of RM1.5bn/year. A lot of proposals/bids are still pending for decision. We believe that Eversendai is facing tough competition from Chinese contractors and also unrests in the Middle East which have hampered development decisions. Despite that, longer term prospects remain good in the Middle East given the potential projects for 2020 Dubai World Expo and 2022 Qatar World Cup. Meanwhile, Eversendai’s outstanding order book remains healthy at RM1.2bn, translating to 1.2x FY12’s revenue.

O&G prospects… Acquired 80% stake in Sumatec Engineering for RM1m. This gives Eversendai the license to bid for structural steel works for petrochemical complexes whereby bids worth RM2bn has been submitted. The fabrication yard in Ras Al Khaimah, Dubai, will be ready by 1HFY14 with RM1.5bn worth of jobs being tendered. Management foresees O&G contract flows by 3QFY14.

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

HOLD

Too much expectation for earnings growth and contract flows have been priced in Eversendai’s share price and it will take earnings recovery in the subsequent quarters to regain back investors’ confidence. Hence, we are maintaining our HOLD call on the company until signs of improvement.

Valuation

Maintain TP at RM1.28 based on unchanged 10x FY14 earnings.

Source: Hong Leong Investment Bank Research - 2 Dec 2013