We  maintain  our  BUY  call,  forecasts  and  MYR1.46  FV  following  an analyst  briefing  last  Friday.  Eversendai  took  great  lengths  to  explain that  its poor 3Q13 results were due to  timing issues  and should not be read as a sign of deterioration in its business model or fundamentals. We still like Eversendai as it is a globally competitive company,  good proxy to the Middle-East oil wealth and an up-and-coming O&G play.

• A MYR35m question.  Eversendai said that its recently announced poor 3Q13  results  were  due  to  timing  and  should  not  be  read  as  a  sign  of deterioration in its business model or fundamentals. The 3Q13 numbers were  eroded  by  variation  order  (VO)  claims  amounting  to  about MYR35m  which  it  had  to  charge  off  as  costs  incurred,  pending settlement by its clients. Upon settlement of the amount by its clients by 2Q or 3Q14, the entire amount will be written back to its P&L.
• MYR1bn more in  new jobs before the year is out?  Eversendai  is still hopeful of netting another MYR1bn in new jobs before the year is out, on top  of  the  MYR593.2m  it  has  secured  YTD.  Nonetheless,  it  did acknowledge that  the timing is at the mercy of clients.  It  spoke again of “a sizeable job from  the Commonwealth of Independent States (CIS)” as well as the usual structural steel jobs from the Middle East.
• Powering ahead with expansion plans.  Eversendai  is powering  ahead with its expansion  both geographically as well as into related segments. Having recently expanded to the  CIS, the group  is now scouting for new business  opportunities  in  Australia  and  East  Africa.  In  terms  of expansion  into  related  segments,  its  key  focus  now  is  on:  i)  oil  &  gas fabrication, and ii) petrochemical plant construction.
• Maintain  BUY.  We  still  like  Eversendai:  i)  for  it  is  a  truly  global construction  company  that  possesses  the  ability,  skills  set  and  track record  to  compete,  survive  and  prosper  in  the  international  structural steel market, ii) as it is good proxy to the oil wealth  (and  indulgence of the oil-rich countries in new iconic buildings which require highly complex steel  structures),  and  iii)  as  it  is  also  an up-and-coming oil  &  gas play(O&G  fabrication  and  petrochemical  plant  construction).  Our  FV  is unchanged at MYR1.46, based on 10x FY14 EPS, in line with our 1-year forward target P/E of 10-16x for the construction sector.

Down But Not Out

Highlights. The key takeaways  from Eversendai’s analyst briefing last Friday are: i) the  poor  3Q13  results  was  due  to  timing  stemming  from  its  inability  to  recognise about MYR35m  in  variation order (VO) claims, ii)  while it is still hopeful for another MYR1bn new contracts  before the year is out, it acknowledged that the timing is at the mercy of  clients, and iii) Eversendai is powering ahead with its expansion plans, both geographically as well as into related segments.

A MYR35m question.  Eversendai  explained  that its recently announced poor 3Q13 results were  a timing issue  and should not be read as a sign of deterioration in its business model or fundamentals. Eversendai disclosed that 3Q13 earnings were hurt by  VO  claims  amounting  to  about  MYR35m  in  total,  which  it  had  to  charge  off  as costs incurred, pending settlement by its clients. Upon settlement of the amount, it will be written back as profits. The group has guided for full settlement of the amount by 2Q or 3Q14.  The MYR35m VO claims came largely from two  on-going  structural steel  projects,  namely,  the  National  Museum  of  Qatar  (MYR216m)  and  the  Worli Mixed Use Development in Mumbai, India (MYR274m). We understand that the VO claims from the former came largely from additional “strengthening works” required due  to  certain  shortcomings  in  architectural  design  of  the  project.  Similarly,  the design for “non-typical” floors of the latter had to be changed, resulting in   additional structural steel works, and hence the VO claims.  

MYR1bn in new jobs before the year is out? Eversendai is still hopeful for another MYR1bn new jobs before the year is out, on top of MYR593.2m it has secured YTD (vis-à-vis  our  full-year  assumption  of  MYR1.2bn  in  FY13).  Nonetheless,  it  did acknowledge that  the timing is at the mercy of  clients.  Eversendai spoke again of  “a sizeable  job  from  the  Commonwealth  of  Independent  States  (CIS)  (or  the  former Soviet states)” as well as the usual structural steel jobs from the Middle East.

Powering  ahead  with  expansion  plans.  Not  disheartened  by  the  soft  patch  in 3Q13, Eversendai is powering ahead with its expansion plans both geographically as well as into related segments. Having recently  expanded into the  CIS, Eversendai is now  scouting  for  new  business  opportunities  in  Australia  and  East  Africa  (with  its primary  target  markets  being  Tanzania,  Kenya  and  Mozambique).  In  terms  of expansion  into  related  segments,  the  group’s  key  focus  now  is  on:  i)  oil  &  gas fabrication, and ii) petrochemical plant construction.

The  expansion  into  oil  &  gas  fabrication  has  gone  live  with  the  investment  in  a MYR50m  fabrication  yard  in  Ras  al-Khaimah  (one  of  the  seven  emirates  of  UAE, about 2-hour drive from Dubai), via a 70:30 JV with 20.1%-owned associate Technics Oil  &  Gas  (TGH  SP,  SELL,  FV:  SGD0.64).  The  yard,  on  54  acres  (comprising  48 acres  of  sea-fronting  land  and  6  acres  of  exclusive  water  area)  is  already  at  fairly advanced  stages  of  construction  with  completion  expected  by  2Q14.  The  JV  has already embarked on a recruitment drive and submitted bids for contracts for topside modules  and  mechanical  installations  in  the  Middle  East  worth  about  MYR1.5bn.

Thus  far,  it  has  secured  from  Petronas  Carigali  Iraq  Holding  BV  a  MYR24.7m contract for the supply of fuel gas conditioning unit to a 15MW power plant.For the expansion into petrochemical plant construction,  Eversendai has set the ball rolling  with  the  recent  acquisition  of  an  80%  stake  in  Sumatec  Engineering  & Construction Sdn Bhd for a nominal sum. Currently very much dormant, Eversendai is reactivating this former unit of Sumatec Resources (SMTC MK, NR) wh ich boasts a track record of 25 years of experience and MYR2bn worth of completed projects in the petrochemical plant construction space. Eversendai said that the unit has already submitted bids for petrochemical plant construction contracts in Malaysia worth about MYR2bn.

Forecasts.  Maintained
Risks.  These include:  i)  new contract  wins in  FY13-14  falling short of our  target  of MYR1.2bn  per  annum,  ii)  escalation  in  input  costs,  and  iii)  failure  or  delays  in settlement of VO claims.

Maintain  BUY.  We  still  like  Eversendai:  i)  for  it  is  a  truly  global  construction company, carrying with it the ability, skill set and track record to compete, survive and prosper in the international structural steel market, ii) as it is good proxy to the oil wealth,  or  more  precisely,  indulgence  of oil-rich countries  (in  the  Middle  East, and increasingly,  CIS)  in  coming  out  with  new  iconic  buildings  which  require  highly complex steel structures, and iii) as it is also an up-and-coming oil & gas play  (oil & gas fabrication and petrochemical plant construction). FV is  unchanged at MYR1.46 based on 10x FY14 EPS, in line with our 1-year forward target P/E of 10-16x for the construction sector.

Financial Exhibits

SWOT Analysis

Company Profile
Eversendai  is  a  structural steel  specialist  with  operations  predominantly  in  the  Middle  East,  Malaysia  and  India .  It  is venturing  into topside fabrication, leveraging on a newly-acquired 20.1% stake in SGX-listed topside fabricator Technics Oil & Gas.

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Source: RHB