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Seremban Engineering 2Q12 within expectations

kiasutrader
Publish date: Mon, 27 Aug 2012, 10:41 AM

OUTPERFORM
Target Price: RM0.59

Period
2Q12/1H12 

Actual vs. Expectations 
  • Seremban Engineering ("SEB") registered a 2Q12 net profit of RM1.5m, which brought its 1H12 net earnings to RM3.5m. 
  • The overall 1H12 net earnings came in well within our expectation and accounted for 63% of our FY12 full year estimate of RM5.6m. Going forward, we are expecting a more moderate result for the 2H. 
Dividends 
No dividend was announced.
Key Results Highlights 
  • QoQ, 2Q12 net earnings dipped by 27% to RM1.5m from RM2.0m, which was due to losses from its associates and the cost overrun at a new turnkey project. 
  • Nonetheless, YoY, the 2Q12 net earnings actually grew 48% from RM1.0m in 2Q11. This was mainly due to higher revenue recorded, which rose by 44% to RM26.8m from RM18.7m.
  • YoY, the 1H12 net earnings of RM3.5m was tripled that of RM1.1m in 1H11 due mainly to the growth in the revenue by 37%, which was attributable to higher overseas fabrication jobs demand, particularly for palm oil refineries in Indonesia. In fact, overseas sales expanded by 135%, which offset the declining domestic sales contribution (- 31%).
  • Despite a higher effective tax rate of 22.7% in 2H12 as compared to 21.6% in 2H11, the YoY net margin increased by 4.1ppt to 7.3% on the back of lower cost of sales. 

Outlook 
  • SEB recently acquired a piece of vacant leasehold land in Lumut for RM4.6m. The purpose of the land purchasing is for the expansion of its fabrication, blasting and painting facilities. 
  • We believe that this 7-acre land is to serve the fabrication project it won from SapuraKencana ("SKPETRO"; OP; TP: RM2.79) as it is nearby SKPETRO's Lumut Fabrication Yard. 
  • We continue to like SEB as its prospects remain positive on the back of increasing activities for its process equipment business and diversification plan into the O&G sector. 

Change to Forecasts 
We are maintaining FY12E net earnings while cutting FY13-14E in view of the higher operating cost as we have factored in a higher depreciation cost due to new machineries, and also the set-up cost for the new land. 

Rating 
MAINTAIN OUTPERFORM 

Valuation 
OUTPERFORM reiterated with a new target price of RM0.59 based on 7x FY13 PER. Our applied PER is based on a 12.5% discount of the average small-cap stocks of 8x PER in view of the stock?'s illiquidity. 

Risks 
Delays in projects execution or contracts award.



Source: KenagaResearch
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