Sino-Thai Engineering & Construction Plc

Sino-Thai Engineering & Construction Plc (STEC)

Investment thesis
We reaffirm that STEC is the best play in the Thai Construction sector. The firm is superior to its competitors in terms of earnings visibility, financial status, sustainability and competitiveness. In addition, we see scope for upside from new projects signed and gross margin—both factors are likely to be higher than the street expectation. In our view, STEC’s current outlook is its best since it was founded. We have increased our PER target to its peak level of 42.4x—3SDs above its 5-year average. Our YE13 target price, thus, rises to Bt48 from Bt36.25. Our BUY rating stands.
Backlog to continues to break records
STEC has signed Bt6.4bn in new contracts to date and will soon sign deals worth Bt13.7bn, including the Bt12.9bn Parliament House job. Its order book stands at a record high of Bt75.6bn, which secures annual top-line growth of nearly 20% for FY13-14. This year, STEC aims to win tenders worth Bt30-35bn, premised on it submitting bids for projects valued at Bt120-140bn with a mean success rate of 25%. We believe the target is achievable and still leaves scope for upside, given that the govt plans to open contracts to bidding worth Bt500-800bn in 2013.
The next mega projects that STEC will tender for include three packages of the Green Line MRT worth Bt11bn each in early 2Q13 and six packages of the double-track railway worth Bt10bn each in late 3Q13.
Most cost-competitive contractor
The firm looks to be the best-placed contractor to win tenders, thanks to its cost advantage. It has no interest costs and has a pile of cash on-hand, so it can pay suppliers in advance, fix material prices and receive discounts. Moreover, STEC plans to cut its costs further by relocating its pre-cast yard closer to Bangkok, which would boost its margin for elevated structure work by 1%. The firm also has the lowest overhead costs of the big-three contractors. Its SG&A/sales ratio was only 2.8% in FY12 versus CK’s 7.6% and ITD’s 5.6%. As such, STEC should be able to bid at more competitive prices than its competitors.
Expanding capacity to add even more projects
Besides adding construction capacity by buying more equipment, STEC will increase its bidding capacity by increasing its registered capital. Its board of directors recently approved paying a stock dividend at a ratio of 3.5:1. Following the stock dividend, STEC's registered capital will rise from Bt1.18bn to Bt1.53bn, which would allow it to bid for more projects at once. Recall that the company couldn’t tender for all the contract packages for the Purple Line and the Red Line, as its registered capital wasn’t sufficient. Following the stock dividend, its bidding capacity should rank with CK, which has a paid-up capital of Bt1.65bn.