Sino-Thai Engineering and Construction

Sino-Thai Engineering and Construction Plc (STEC)
 

Investment thesis: Although we have a NEUTRAL rating on the Construction sector, due to a paucity of short-term catalysts, STEC stands out from its peers in terms of securing new projects, earnings visibility and balance sheet strength. As such, it is the only contractor that we are happy to rate as a long-term BUY. STEC’s valuation is compelling—it currently trades on FY12 PER of only 14.9x, versus, 4-year average of 18.1x.
Slow 4Q11 is behind us: CFO Woraphant Chontong guided at the analyst meeting last Friday that the FY11 top-line will fall slightly short of the target of Bt15bn, as the flooding halted construction of the Purple Line for one and a half months and made for slow progress at some other projects, due to logistics problems. We expect 4Q11 revenue of Bt2.8bn (down by 15% YoY and 34% QoQ) and a net profit of Bt134m (down by 12% YoY and 51% QoQ).
Looking ahead to FY12: STEC's attractiveness, which stands out in stark contrast to the other contractors we cover, lies in its clear earnings visibility. Despite the short-term hiccup caused by the flooding, the medium-term prospects remain very good. The current backlog of Bt52bn alone is expected to boost the FY12 top-line by 30% YoY. Margin won’t be a concern, so long as the global economic slowdown continues to pressure down material prices. Moreover, higher labor costs resulting from govt policy should be mostly offset by a lower corporate income tax and more use of machinery.
More projects to come: Despite delays to state project tenders (due partly to flooding), STEC should secure more work in its areas of specialist expertise, such as power plants and industrial plants. It is in a good position to win EGAT’s 800MW North Bangkok 4 power plant and 39 upcoming SPP projects. Moreover, it may secure a pre-assembly module project for an LNG plant in 2H12 (to be built here and assembled in Australia).
Potential M&A? The CFO said that STEC might use its pile of cash on-hand (which now totals Bt4.3bn) to invest in related businesses, which could support and synergize with the core operation. He declined to disclose any details for the moment, but said that they wouldn’t be concession businesses (like CK and ITD).