We maintain our Buy call and fair value of RM1.80 on the heels of the company’s reassurance that it will be spared contract disputes or job cancellations that recently hit a few Malaysian companies in the Middle East.  We like the company as it is a good proxy to the construction sector in the Middle East, particularly, Qatar that is poised for a construction boom ahead of its hosting of the 2022 FIFA World Cup.

¨      Selldown unjustified.  We believe the selldown on Eversendai shares, following a slew of news with regards to contract disputes and job cancellations involving Malaysian companies in the Middle East this month, is unjustified. 

¨      No contract dispute and job cancellation in the Middle East.  Eversendai confirmed that it has not had any major contract disputes with its clients in the Middle East in the past and it currently does not have any major outstanding contract dispute with any client.  Eversendai also has not encountered any major job cancellation in the Middle East in the past and it believes that it is not prone to job cancellation by virtue of its unique position in the entire construction value chain, i.e. as structural steel specialist subcontractor who basically comes in “not too early and not too late” during the construction period.

¨      Bullish on Qatar.  Eversendai reiterated its bullish view on Qatar, the host of 2022 FIFA World Cup.  It noticed that at present, the focus is on “upgrading the skyline”, i.e. building more iconic buildings that will soon be extended to stadiums and other infrastructure and facilities.

¨      Maintain BUY.  We like Eversendai as: (1) It is a good proxy to the construction sector in the Middle East, particularly, Qatar that is poised for a construction boom ahead of its hosting of the 2022 FIFA World Cup; (2) It is a good proxy to the Klang Valley MRT project given the strong likelihood of its involvement in structural steel works for stations; and (3) It is a preferred structural steel specialist for international contractors given its strong track record in structural steel works for various iconic buildings in the Middle East.  Fair value is RM1.80 based on 12x FY13 EPS, in line with our 1-year forward target PER of 8-13x for the construction sector.

Market Barks Up The Wrong Tree?

Highlights.  We believe the selldown on Eversendai shares, following a slew of news with regards to contract disputes and job cancellations involving Malaysian companies in the Middle East this month, is unjustified.  We believe the market has barked up the wrong tree.  Key takeaways from our group meetings with Eversendai during our Asean and Hong Kong Corporate Day on 25 Apr 2013 are: (1) Eversendai does not have any major outstanding contract dispute in the Middle East; (2) Eversendai has not encountered any major job cancellation in the Middle East and does not believe it bears a high risk given its unique position in the entire construction value chain, i.e. as structural steel specialist subcontractor; and (3) Eversendai could sense that the construction boom in Qatar is starting (ahead of the 2022 FIFA World Cup) with the key focus now being on building iconic buildings, that will soon be extended to stadiums and other infrastructure and facilities.

No contract dispute in the Middle East.  Eversendai confirmed that it has not had any major contract disputes with its clients in the Middle East in the past and it currently also does not have any major outstanding contract dispute with any client.  To recap, the concern arises following losses suffered by Gamuda and WCT amounting to MYR27.4m and MYR26.3m respectively when an arbitration sometime this month ruled against a 51:49 Gamuda-WCT JV in its contract dispute with its subcontractor Bahrain Asphalt Establishment for the Dukhan Highway project in Qatar.  This serves as a strong reminder to the market of the high risk carried by companies doing business in the Middle East.

No job cancellation in the Middle East.  Eversendai also has not encountered any major job cancellation in the Middle East in the past and it does not believe it bears a high risk.  To recap, the concern arises following the cancellation also sometime this month of WCT’s MYR1bn Package 2 of Batinah Expressway in Oman and MMC Corp’s US$30bn (MYR90bn) Jazan Economic City in Saudi Arabia.  Eversendai believes that it is not prone to job cancellation by virtue of its unique position in the entire construction value chain, i.e. as structural steel specialist subcontractor who basically comes in “not too early and not too late” during the construction period, i.e. right after the completion of basic civil works such as earthwork and piling.  This is quite a sweet spot as projects are less prone to cancellation after the basic civil works are put in (as compared with if the projects are just starting).  In addition, the projects Eversendai handles in the Middle East are predominantly building jobs that generally “do not run into billions of ringgit” and as such stand a slimmer chance of being cancelled due to funding issues.

Bullish on Qatar.  Eversendai reiterated its bullish view on Qatar, the host of 2022 FIFA World Cup who is racing to build basic infrastructure, iconic buildings, 12 stadiums, 90,000 new hotel rooms, etc, ahead of the major global sporting event.  It noticed that at present, the focus is on “upgrading the skyline”, i.e. building more iconic buildings.  It believes this will soon be extended to stadiums and other infrastructure and facilities to support the event as well as to accommodate the expected 400k football fans from around the world during the event.

Forecasts.  Maintained.

Risks.  These include: (1) New contracts secured in FY13-14 coming in below our targets of MYR1.2bn per annum; and (2) Escalation in input costs.

Maintain BUY.  We like Eversendai as: (1) It is a good proxy to the construction sector in the Middle East, particularly, Qatar that is poised for a construction boom ahead of its hosting of the 2022 FIFA World Cup; (2) It is a good proxy to the Klang Valley MRT project given the strong likelihood of its involvement in structural steel works for stations; and (3) It is a preferred structural steel specialist for international contractors given its strong track record in structural steel works for various iconic buildings in the Middle East.  Fair value is MYR1.80 based on 12x FY13 EPS, in line with our 1-year forward target PER of 8-13x for the construction sector.

Source: RHB