Seremban Engineering 2Q12 within expectations

OUTPERFORM

Target Price: RM0.59

Period

2Q12/1H12 

Actual vs. Expectations 

• Seremban Engineering ("SEB") registered a 2Q12 net profit of RM1.5m, which brought its 1H12 net earnings to RM3.5m. 
• The overall 1H12 net earnings came in well within our expectation and accounted for 63% of our FY12 full year estimate of RM5.6m. Going forward, we are expecting a more moderate result for the 2H. 

Dividends 

No dividend was announced.

Key Results Highlights 

• QoQ, 2Q12 net earnings dipped by 27% to RM1.5m from RM2.0m, which was due to losses from its associates and the cost overrun at a new turnkey project. 
• Nonetheless, YoY, the 2Q12 net earnings actually grew 48% from RM1.0m in 2Q11. This was mainly due to higher revenue recorded, which rose by 44% to RM26.8m from RM18.7m.
• YoY, the 1H12 net earnings of RM3.5m was tripled that of RM1.1m in 1H11 due mainly to the growth in the revenue by 37%, which was attributable to higher overseas fabrication jobs demand, particularly for palm oil refineries in Indonesia. In fact, overseas sales expanded by 135%, which offset the declining domestic sales contribution (- 31%).
• Despite a higher effective tax rate of 22.7% in 2H12 as compared to 21.6% in 2H11, the YoY net margin increased by 4.1ppt to 7.3% on the back of lower cost of sales. 

Outlook 

• SEB recently acquired a piece of vacant leasehold land in Lumut for RM4.6m. The purpose of the land purchasing is for the expansion of its fabrication, blasting and painting facilities. 
• We believe that this 7-acre land is to serve the fabrication project it won from SapuraKencana ("SKPETRO"; OP; TP: RM2.79) as it is nearby SKPETRO's Lumut Fabrication Yard. 
• We continue to like SEB as its prospects remain positive on the back of increasing activities for its process equipment business and diversification plan into the O&G sector. 

Change to Forecasts 

We are maintaining FY12E net earnings while cutting FY13-14E in view of the higher operating cost as we have factored in a higher depreciation cost due to new machineries, and also the set-up cost for the new land. 

Rating 

MAINTAIN OUTPERFORM 

Valuation 

OUTPERFORM reiterated with a new target price of RM0.59 based on 7x FY13 PER. Our applied PER is based on a 12.5% discount of the average small-cap stocks of 8x PER in view of the stock?'s illiquidity. 

Risks 

Delays in projects execution or contracts award.

Source: KenagaResearch