Highlights

• Revived bullishness. Last week, we met up with Eversendai’s MD, Tan Sri AK Nathan and left on an upbeat tone, fuelled by 3 catalysts: recovering earnings, surging job wins and a strengthening US dollar.

• “Problematic 3” have left. Earnings delivery has been questionable in the past 2 years, being plagued by variation orders (VOs), high O&G start-up costs and associate losses. This is now history with VO related jobs completed, O&G jobs contributing and Technics no longer an associate. As a result, earnings in the last 2 quarters rebounded strongly.

• Orderbook at a high… Eversendai’s orderbook currently stands at an all-time high of RM2bn. This translates to a strong cover ratio of 2x, the highest level compared to its historical range of 1.1-1.6x.

• …with surging job wins. FY14 was a strong year for job wins at RM1.1bn (FY13: RM669m) and the momentum is continuing into FY15 with RM864m bagged YTD (62% of our RM1.4bn full year target). Management aims to surpass its previous high of RM1.7bn in FY10. This implies that another RM804m worth of contracts could be forthcoming in the next 6 months. Contracts are likely to materialise from the Middle East, selectively in India, RAPID and KL118.

• Beneficiary of a strong dollar. Last week, the ringgit hit a 9-year low against the dollar at RM3.77/USD. Eversendai is a beneficiary of a strengthening dollar as 76% of its orderbook is in the Middle East whose local currencies are pegged to the dollar.

Risks

• Delay in orderbook execution is a key risk to its earnings recovery prospects.

Forecasts

• We raise FY15-17 earnings by 4-9% as we impute higher revenue recognition on its orderbook.
• Coming off a low base in FY14, we project FY15 earnings to surge 70% YoY to RM64m. This will further increase to RM93m (+46% YoY) and RM114m (+23% YoY) in FY16-17.

Rating

BUY TP: RM1.55 (+82% upside)

• Admittedly, Eversendai’s share price has been a major disappointment, being mostly “underwater” since its IPO in July 2011. It is currently 50% below its offer price.
• However, we believe that a reversal of fortunes is forthcoming. The “problematic 3” are gone and earnings are set to recover strongly (3 year CAGR: 45%) underpinned by its all-time high orderbook and surging job wins. Eversendai also offers investors an exposure to the thematic strengthening US dollar play.

Valuation

• We raise our SOP based TP from RM1.06 to RM1.55 following our earnings upgrade and rolling over from FY15 to FY16. Our TP implies FY15 P/E of 18.9x but a much more palatable 13x and 10.5x in FY16-17 once the earnings recovery (or shall we say “growth”) gains further motion.

Source: Hong Leong Investment Bank Research - 15 Jun 2015