วันอังคารที่ 26 พฤษภาคม พ.ศ. 2552

Phillip Crude Oil Stock Recommends Buy STEC

Sino-Thai Engineering and Construction – STEC - BUY

12-month target price : Bt3.50
Recommendation : BUY
Closing Price (16 Feb 09) : 3.30

4Q08 net profit above forecast on lower-than-expected SG&A expenses
- Construction and engineering firm STEC posted better-than-expected 4Q08 results on lower-than-expected SG&A expenses.

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- The absence of revenue contribution from low-margin projects and the new projects in the pipeline would accelerate the return to profitability.
- In our view, this presents a good opportunity to make a speculative play on the stock ahead of a bid for work on a mass transit project. We keep a BUY stance on STEC with a price target of Bt3.50/share.

4Q08 net profit above forecast on lower-than-expected SG&A expenses
Third-ranked construction contractor STEC posted a net profit of Bt81m in 4Q08. The result was higher than the Bt44m profit it made in the prior quarter and reversed a Bt182m loss in the same quarter in 2007. Contracting revenue slipped 2% YoY and 3% QoQ. Gross margin stayed flat from the prior quarter, but improved from a minus 2% in the same quarter in 2007. SG&A expenses fell to Bt60m in 4Q08 from Bt90m in 3Q08 and 4Q07. The profit figure was up both QoQ and YoY. The results topped our forecasts on lower-than-expected SG&A expenses. In our view, actual SG&A expenses came in below its expenses provisions set aside in 1Q08-3Q08, a move that resulted in a downward adjustment in SG&A expenses in 4Q08.

Better road ahead: The absence of revenue contribution from low-margin projects and new projects in the pipeline would accelerate return to profitability
STEC had an order backlog of Bt10b as of 4Q08 with an average construction time of about two years. In our opinion, this backlog alone is not enough to drive 2009 revenue above the 2008 level of Bt14b. Though STEC lost the bid for the first contract of the purple-line mass transit project, it still has a chance of winning the second and third contracts of the project with the median price of Bt14b and Bt7b respectively, including the red-line and blue-line mass transit projects to be later put up for bid. Even if the investigation of the National Counter Corruption Commission (NCCC) over the increase in the median price and the changes in the Terms of Reference (TOR) in a move alleged to have benefited some construction contractors may delay the process, we maintain our view that things will eventually move forward as the mass transit projects are part of the government's economic stimulus measures. If we assume that STEC will win the second contract of the purple-line mass transit project, the total orderbook value will be about Bt8b to Bt10b a year, and the Airport Rail Link project and the new Bangkok Government Complex project, both of which generate zero margins will be delivered this year, we estimate 2009-10 pre-exceptional EPS to be about Bt0.10 and Bt0.16 respectively against Bt0.10 in 2008.

Speculative play ahead of a bid for work on a mass transit project
The 2009-10 P/E multiples of 31x and 19x represent a relatively significant premium to the market P/E ratio of 7x due partially to strong speculative interest ahead of a bid for work on a mass transit project. For speculative trading, we set a price target of Bt3.50/share for STEC, equivalent to 22.50x 2009 P/E. With a project life of about 3-4 years and the difficulty of raising contract price following announcement of the bid results, a risk to profit will return if building materials prices head back up. In our view, this presents a good opportunity to make a speculative play on the stock ahead of a bid for work on a mass transit project.

By Phillip Securities (Thailand) Plc. on Feb 17, 2009

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