Sino-Thai Engineering & Construction

Sino-Thai Engineering & Construction Plc (STEC)

Core profit in line with expectation
STEC reported a 4Q13 net profit of Bt666m, up by 138% YoY and 72% QoQ. The figure beat our estimate by 72%, due to a Bt294m gain from a fair value adjustment on investment properties. Excluding the gain, core profit was in line with our estimate.
Results highlights
Revenue rose 10% YoY but dipped 3% QoQ to Bt6.0bn, in line with our expectation. Gross margin expanded to 9.7% from 8.8% in 3Q13, slightly higher than our model, thanks to good progress at high-margin projects, such as power plants and the MRT Blue Line.
The balance sheet remained healthy with a net-cash position of Bt8.5bn at YE13.
Outlook
STEC’s strong growth period appears to have already peaked in FY13. The current backlog of Bt51bn will generate top-line growth of only about 3%, while revenue from projects that are expected to be signed this year is likely to be minimal, given the prevailing political turmoil. Management expects to ink only Bt20bn worth of new projects this year versus Bt26bn in FY13, which implies backlog depletion. Moreover, gross margin will tend to decline on a higher proportion of low-margin projects in the revenue mix. Our model assumes GM of 8.6% in FY14, in line with STEC’s guidance of 8-9%.
What’s changed?
We have revised down our YE14 target price to Bt18.40 (from Bt23.50), pegged to the firm’s long-term average PER of 18.2x. We think Contractors should trade at their average historical PERs (at best) so long as there remains such intense uncertainty over the outlook for new project tenders.
Recommendation
Given that it is a pure construction play, STEC’s earnings outlook appears to be weaker than that of CK. We don’t recommend taking positions until the political situation improves or a new government takes office. Our HOLD rating stands.