Sino-Thai Engineering and Construction

Sino-Thai Engineering and Construction Plc (STEC)

10% above estimate: STEC reported a 2Q12 net profit of Bt266m, up 21% YoY but down 12% QoQ. The figure beat our estimate by 10%, due to a fatter gross margin than expected.
Results highlights: Revenue increased in line with our model by 16% YoY and 3% QoQ to Bt4.4bn. Gross margin was 9.5%, significantly stronger than our assumption of 8.4%. The SG&A/sales ratio was 2.8%, consistent with our estimate.
Operating profit grew by 36% YoY and 4% QoQ to Bt273m, while operating margin was 6.2%, up 91 bps YoY and flat QoQ.
STEC resumed paying full tax in 2Q12 after burning through the last of its tax shield in 1Q12. As such, net margin declined 103 bps QoQ, but was still 23 bps fatter YoY.
The balance sheet remained healthy with a net cash position of Bt4.2bn at end-June.
Outlook: We expect further QoQ improvements in both 3Q12 and 4Q12, driven by rising construction income.
What’s changed? We have upgraded our FY12 earnings forecast by 3% in order to factor in the strong 2Q12 performance and the promise of sustained gross margin expansion. As a result, our YE12 target price rises to Bt16.50 from Bt15.90. Our new target price implies an FY12 PER of 17.6x and a YE12 PBV of Bt3.1x.
Recommendation: STEC is the only big contractor whose fundamentals make it worthy of taking a position in. The firm has the clearest earnings visibility and the healthiest balance sheet in the sector, making it the best and safest play in contractor space. Our BUY rating stands.