Rohas recently secured fabrication contracts for 130 towers (RM19.5m) for Phase 1 of the Sarawak telco towers with rollout for phase 2 to come. We expect core earnings to improve sequentially underpinned by completion of its loss making HGPT legacy contracts and stronger fabrication orders. Orderbook stands at RM230m (1.5x cover) for towers and RM420m (1.8x cover) for EPCC. Increase FY20-21 earnings forecast by 10-14% and upgrade to BUY rating with higher TP of RM0.79 after earnings adjustment based on 12x PE multiple to reflect improved outlook for its tower fabrication segment.

Below Are the Key Takeaways From Our Recent Meeting With Rohas’ Management.

HGPT. Legacy projects that contributed to its poor FY18 results are completed and are not expected to impact financials going forward. Normalized earnings of HGPT should amount to c.RM10m per annum based on management’s guidance.

Penang. Rohas has submitted tender for a transmission line from Butterworth to Penang Island which will run parallel to the Penang Bridge (estimated project value: RM1bn). There are 5 bidders: from China, India, Australia, Rohas-Muhibbah and MMC-MRCB. The JV structure between Rohas and Muhibbah has not been fixed but will likely be based on job scope breakdown (civil marine works will be >50% of project value). Having undertaken the widening of Penang Bridge before, we reckon Muhibbah is a good partner for Rohas (which will then undertake the transmission line portion of works). Tenders will close end-Nov with award likely in 1Q20.

Outstanding orderbook. Tower division outstanding orderbook currently stands at c.RM230m, translating into 1.5x of FY18 tower revenue. EPCC orderbook stands at RM420m, translating into 1.8x of FY18 EPCC revenue.

Laos EPCC. Progress for Laos EPCC contract (RM300M) is on target with completion rate at c.60% (RM180m). The company is targeting to achieve at least 70% completion rate end of FY19 with project completion by March 2020.

Sarawak. Phase 1 of Sarawak telco towers has been rolled out with Rohas securing fabrication contracts for 130 out of 300 towers tendered with an estimated value of RM19.5m (RM150k per tower). Earnings contribution (c.3m PAT) should flow through in 4Q19 as deliveries must be made by end November. Recall that Sarawak has allocated c.RM1bn for the rollout of telco towers (including EPCC and tower costs) over the long term.

Associates. Rohas 49%-owned mini-hydropower plant in Indonesia is expected to start contributing in FY20, a delay from 2Q19 due to unusual raining reason. Management guides that the earnings contribution to Rohas is expected to be c.RM4m annually. Its 40% loss-making Vietnam associate owns a 40MLD WTP with an 80MLD intake capacity. The mismatch leads to higher depreciation cost relative to the amount of water they can sell. Consequently, the associate is looking to double its WTP capacity to 80MLD with the EPCC job likely to fall to Rohas (USD15m).

Forecast. Raise FY20-21 earnings by 10-14% (FY19 unchanged) after imputing contribution from Vietnam EPCC job (USD15m) and HGPT earnings recovery.

Upgrade to BUY, TP: RM0.79 Upgrade to BUY with higher TP of RM0.79 (from RM0.57) following the earnings adjustment. We reckon with the completion of its legacy contracts, earnings should grow sequentially driven by better margins at HGPT, new EPCC jobs and stronger tower orders. TP is pegged to 12x P/E multiple (from 11x) to FY20 earnings to reflect an overall improved outlook.

Source: Hong Leong Investment Bank Research - 19 Nov 2019