MARKET PULSE: Consumer Sector, Rotary Engineering (4 Mar 2013)

Stock Name: Rotary
Company Name: ROTARY ENGINEERING LIMITED

Research House: OCBC

Price Call: SELL

Target Price: 0.34

MARKET PULSE: Consumer Sector, Rotary Engineering

4 Mar 2013

KEY IDEA Consumer sector: Outperform STI in 2013? Summary: Companies included in the FTSE Straits Times Consumer Services Index showed continued improvement in the 4QCY12 earnings season with both top and bottom-line figures exceeding consensus estimates. Revenue was stronger than expected (+10.3% over forecasts) while a combination of cost-control initiatives and favourable input prices during the period saw average earnings per share beat consensus projections by 16.6%. In our view, this mirrors the growth in contribution from overseas markets - particularly EM-Asia - as domestic retail sales figures were tepid during the same period. In the coming months, we continue to favour counters with greater EM-Asia exposure but urge investor caution as the recent upward re-rating of the sector has led to some counters being priced ahead of fundamentals. As such, we also maintain our preference for counters with defensive qualities like Sheng Siong [BUY; FV: S$0.69]. Maintain NEUTRAL on the overall consumer sector. (Lim Siyi) MORE REPORTS Rotary Engineering Ltd: JV deficit remains unresolved Summary: Rotary Engineering Limited (Rotary) reported a second consecutive quarter of losses with 4Q12 net losses to shareholders of S$18.4m (3Q12: S$66m). Last quarter was marked by additional provisions made for its SATORP project and lower volume of work due to the late start of Fujairah Oil Terminal (FOT) project. FY12 revenue was down 16% to S$444m, while loss attributable to shareholders was S$80m, compared to profit of S$31m in the previous year. While the SATORP execution issues may be largely behind, the deficit at its JV remains unresolved. In a worst case scenario, Rotary - being the controlling shareholder - may need to take an impairment loss. Another concern is the tight labour market in Singapore, which represents about 50% of Rotary's order-book. Maintain SELL with an unchanged S$0.34 fair value estimate. (Chia Jiunyang)

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NEWS HEADLINES - US markets rose on Friday as investors looked past the risks to the economy of impending federal spending cuts and bid up equities. The Dow was up 0.25%. - The total market capitalisation of SGX-listed companies fell 1.2% in Feb as the stock market took a breather after hitting a multi-year high in Jan. - Hotel room rates in Singapore climbed to a record high, coming in at an estimated S$261 for 2012 as a whole and making the city-state's average rate among the priciest in the region. - Shoebox units could benefit from the new tax policy which imposes a more progressive tax structure on residential homes, according to a report by Knight Frank. - Hong Leong Asia posted a net loss of S$34.9m for FY12, as compared to a net profit of S$83.3m a year ago. - Fu Yu Corporation has turned a profit for 4Q12 but it could be placed on the watch-list as this is the third consecutive year the group has recorded pre-tax loss. - Q&M Dental Group posted a S$5.0m profit for FY12, up 9.2%, on the back of stronger performance at its existing dental clinics, and contributions from new outlets.