We attended Eversendai’s Analysts’ Briefing yesterday and came away from the briefing with neutral to positive feelings. Eversendai’s GMD Dato’ AK Nathan advised investors and analysts not to be “unduly worried” about the below-than-expected margin (9.7% vs. the average net margin of typically 11.0%) recorded in 1QFY13 as this was only due to timing issues on the progressive billings. Hence, Eversendai is maintaining its targeted PATAMI margin of 11% for FY13. The management also explained that its venture into oil and gas has started to gain traction as it has already allocated a RM50m capex for a fabrication yard in UAE. In fact, Eversendai has already tendered for RM700m worth of Middle East O&G jobs. However, we have conservatively trimmed our FY13 new orders assumption to RM1.1b from RM1.7b as management said it would be quite a  “tall order” to achieve it. Therefore, our earnings estimates have been cut accordingly by 2%-11% for FY13-FY14. All in, we are maintaining our OUTPERFORM call with a revised TP of RM1.68 based on a PER of 9.0x FY14EPS. 

Targeted 11% net margin in FY13 is intact despite 1Q13 weak results. Recall that Eversendai’s 1QFY13 net profit declined by 17% YoY in tandem with a lower revenue (-11% YoY) that was aggravated by its slower billings in the Middle East. Management shared that this is a normal practice in Eversendai’s nature of business as variation orders (VO) would be negotiated and claimed if one’s project required higher complex structures than usual. It expects the VOs negotiation to be concluded soon and guided that billings should be restored in 2H13. Hence, the average Eversendai’s net margin of 11% is likely to be achieved in FY13.  

Tendered for RM700m worth of O&G jobs in the Middle East. Eversendai has incorporated a subsidiary company, Eversendai Technics Sdn Bhd in April 2013 of which it owned a 70% equity stake while the remaining 30% is owned by its 19%-owned associates, Technics Oil & Gas Limited. The rationale of the incorporation is to undertake O&G’s engineering, construction and fabrication services jobs. It has already allocated a RM50m capex for a fabrication yard in UAE, where it is renting 215.3k sq ft of land (25-year lease) in Ras Al Khaimah, UAE (a free trade zone). In fact, Eversendai is already bidding for RM700m worth of Middle East Oil & Gas jobs mainly in topsides, modules and mechanicals scope of works. We believe Eversendai is able to win some of them due to: 1) its strong track record and the fact that some of the potential jobs are from the same clients that it had previously worked with, 2) the fact that it can leverage on its core existing steel-structural business with Technics’ track record in the O&G industry and 3) its strong financials.

RM1.5b order book. For the YTD, Eversendai has secured RM443m in new jobs so far this year. Its order book stands at RM1.5b and can last it until 2016. 

RM1.3b FY13 new contracts will be a “tall order”? Eversendai is still bidding for selective structural steel projects in the Middle East, Malaysia and India with a total tender book amounting to RM8b. Management has conservatively said that the consensus assumption of RM1.3b in new orders for FY13 is a “tall order” to achieve although they will try to achieve it. Hence, to be prudent, we have revised downwards our FY13 new orders assumption amount of RM1.7b to RM1.1b. It is, however, still above that of last year’s RM924m in new contracts. 

Maintain OUTPERFORM with a lower TP of RM1.68. All said, we have revised downwards our net profit forecasts by 2%-11% for FY13-FY14 after trimming our order book assumption. Post the earnings revision, our TP has been adjusted to RM1.68 (from RM1.71) but we are still maintaining an OUTPERFORM recommendation on the stock. Our TP is valued based on a PER of 9.0x on the FY14EPS.

Source: Kenanga