Sino-Thai Engineering and construction

Sino-Thai Engineering and construction Plc (STEC)

Beat estimate by 26%
STEC reported a 1Q13 net profit of Bt403m, up by 34% YoY and 44% QoQ. The figure was 26% above our estimate, due to higher-than-expected gross margin and other income.
Results highlights
The top-line grew 29% YoY to Bt5.5bn on an expanding backlog. Gross margin was 9.2%, significantly stronger than our assumption of 8%, thanks to contributions from newly-signed contracts with fat margins and better cost-control for mass transit construction operations.
The SG&A/sales ratio was only 2.4%, down from 2.9% in 1Q12, due to rising economies-of-scale.
The balance sheet remained healthy with a net-cash position of Bt7.7bn at end-March, up from Bt6.8bn at YE12.
Outlook
Strong earnings momentum should continue throughout the year, backed by a large backlog of Bt70bn and sustained high gross margin.
What’s changed?
We have raised our GM assumption for FY13 to 8.67% from 8.06%, prompted by better cost control for mass transit works and fatter margins for new projects than earlier assumed. As a result, our FY13 earnings forecast jumps 22%, which pushes up our YE13 target price up slightly to Bt38 from Bt37.25.
Recommendation
STEC remains the best play on the Thailand infrastructure upgrading theme, as it has a cost advantage over its closest competitors, substantial capability and good chances of winning more mega project tenders. Moreover, it is pure-play construction firm, so its earnings profile is more sensitive to the expansion of its backlog than is the case for the other big contractors. Our BUY rating stands.