Sino-Thai Engineering & Construction

Beat our forecast by 30%

STEC posted 2Q15 earnings of Bt320m, down 19% YoY and flat QoQ. The results were 30% higher than our model due to higher-than-expected construction revenue and gross margin.

Results highlights

Revenue was Bt4.9bn, down 4% YoY but up 18% QoQ. The YoY decline was due to the smaller backlog in hand, while QoQ improvement came from the peak revenue cycle of some projects and from the groundbreaking of newly signed projects. Gross margin was 9.5%, down from 11.5% in 1Q15 and 10.3% in 2Q14 due to higher revenue contribution from low-margin projects.

SG&A expenses rose 4% YoY to Bt146 from higher salaries at head office and depreciation expenses. Given the lower revenue, SG&A expenses/revenue thus increased to 2.9% in 2Q15 from 2.7% in 2Q14.

Outlook

Although 2Q15 revenue was higher than our estimate, STEC still keeps its top-line guidance of Bt19-20bn for this year, consistent with our model, and implying that revenue will continue falling YoY in 2H15. Gross margin in 2H15 also tended to slim to around 8-9% following greater contributions from low-margin projects.

What’s changed?

We have upgraded our FY15 earnings estimate by 12% to reflect the stronger-than-expected results. Our YE15 target price has therefore been raised to Bt27.25 from Bt26.

Recommendation

We are in the camp that believes there will be a series of big-ticket project biddings in late FY15 to early FY16. If our thesis is right, the stock may rerate to trade at 1.5-2.0SD above its long-term average PBV (based on historical data). So, at the current PBV (+0.9SD above long-term mean), there will be a 19-35% potential upside to that level. We thus maintain our BUY rating on STEC.