Sino-Thai Engineering & Construction

Sino-Thai Engineering & Construction Plc (STEC)

Backlog now at Bt75.2bn
Backlog additions in 2013 to reach Bt40bn from Bt19.6bn YTD
Reduce TP 21% to Bt30/share (DCF method) by increasing beta to 1.5 and risk premium to 7.8%; still recommend BUY

Latest backlog is Bt75.2bn. After signing a contract with the government to build the new parliament building valued at Bt11.5bn in May 2013, STEC has signed a new Bt980mn contract for the construction of a building services system for the CP group’s “Leadership Institute”. Construction has begun, with completion scheduled for Feb 2015. This brings new backlog this year to Bt19.6bn and total backlog to Bt75.2bn.
Government project spending on schedule. Although facing accusations that the Bt2trn bill may violate Article 169 of the Constitution, the government plans to start its Bt2trn infrastructure development projects next fiscal year, which starts Oct 1, 2013. It hopes to increase public investment by Bt300-400bn annually over seven years to boost compound GDP over the period to Bt120trn.
2013 additional backlog to reach Bt40bn. STEC targets adding Bt40bn in backlog in 2013 and has already reached ~48% of target (Bt19.6bn). Power plant construction is one of its strong points – and in June, Gulf Energy Development Co, which it has done work for in the past, was the only winner in the third round of IPP bidding, with combined capacity of 5,000MW, worth ~Bt21.5bn. Expected COD is 2021. STEC also expects to get some of the new jobs being parceled out by the government, particularly its Bt2trn in infrastructure projects and specifically the mass rapid transit (MRT) bids. There are three MRT lines (Dark Green, Pink and Orange) lined up to be put up for bid once the Bt2trn infrastructure project act is passed, with the bidding expected to open in fiscal year 2014 (starting October 1, 2013).
High backlog equals strong earnings prospects. Despite the concerns of delays in the Bt350bn flood management projects (in which STEC did not participate) and other government plans, the environment for contractors still looks good. The Bt2trn infrastructure development is likely to begin in a small way in this calendar year with a substantial outlay in 2014, We expect STEC’s revenues to reach a new high in 2013 at Bt25.9bn, +30.5% YoY growth, with a net profit of Bt1.526bn (EPS of Bt1.00),+30.9% YoY. Gross margin in 2013 is expected to improve to 8.9% from 8.4% in 2012. Net margin in 2013 is expected to be 5.9%, stable from 2012. 
Valuation and recommendation. We reduce target price to Bt30 from Bt38 by increasing the equity risk premium (ERP) to 7.8% from 6.5% and adjusting beta to 1.5 from 1.4. Our fair value is estimated from DCF (discounted cash flow) over seven years, assuming risk-free rate (RFR) of 4.5%, equity risk premium (ERP) of 7.8%, beta 1.5, and terminal growth of 3%.