Rotary Eng (UOB Kay Hian buy call)

Rotary Engineering: Big contract in the bagRotary is an integrated engineering, procurement and construction (EPC)group, which is capable of handling approximately 75% of the worksin-house. Rotary has secured a huge S$535m EPC contract for an oil terminalin Jurong Island from Universal Terminal (S) Pte Ltd in January. Thisboosted current net order book to S$649m, compared with S$143m as of endFY05 and S$109m as of end FY04. As such, we expect Rotary to have anotherrecord earnings year in FY06, boosted by an unprecented surge in order bookand a huge jump in profit margins. We project net profit to jump 272.5% YoYto S$31.2m in FY06, after factoring in the expected surge in interest costsrelating to higher project financing. Looking ahead, Rotary should see morebusiness opportunities in the booming demand for petroleum storage in Chinaand Singapore, increasing works for offshore structures, and industrypreference for onshore tankage due to port security issues. Our fair valuefor Rotary is S$0.73, based on 2.2x P/B ratio, and an implied 9.5x FY06PER. We believe that the use of P/B ratio is the most appropriate valuationmetric for Rotary, due to the cyclical nature of the EPC market and itslumpy contract wins. As such, we are initiating coverage on Rotary with aBUY rating. (Chong Wee Lee)