Seremban Engineering - 4Q12 above expectations

Period  4Q12/12M12

Actual vs. Expectations   The 4Q12 net earnings of RM1.4m brought FY12 full year net earnings to RM7.1m, above our expectations of RM6.3m.

 The higher-than-expected revenue and lower-thanexpected effective tax rate for FY12 were the main factors for the outperformance.

Dividends  No dividend was announced in 4Q12 and hence the full-year NDPS of 2 sen to date would be below our expectations of 3 sen for FY12.

Key Results Highlights  QoQ, the revenue was down by 23.8% due to a decrease in both its domestic (-23.7%) and international (-23.8%) sales and a one-off provision for doubtful debts on a doubtful debt that led to lower PBT margins. However, the saviour for the results was the tax credit (which arose from the utilisation of reinvestment allowances given the completion of its Factory 7 located in Senawang).

 YoY, the net profit was down by only 6% despite a reduction of 24.5% in the revenue due to the tax credit mentioned above.

 For the YTD, the net earnings of RM7.1m was up 79.6% due to: 1) a higher revenue (+19.6%), especially from the overseas segment (+57%) and 2) better margins from the overseas segment attributable to the higher overseas fabrication jobs demand, in particularly for palm oil refineries in Indonesia.

Outlook  According to Oil World data, palm oil production in Indonesia is estimated to enjoy an annual growth of 5.8% in 2013, which will be a booster to SEB’s FY13E revenue and earnings.

 The company targets the commencement of its new fabrication operation facility in Lumut by end-13, which could be a further catalyst to FY14 earnings and heighten its exposure to the oil and gas market.

Change to Forecasts   We have adjusted our FY13-14E net earnings up by 5.3% and 1.9% respectively to RM7.9m-RM9.6m (from RM7.5m-RM9.4m) on the back of FY13-14 revenue growth assumptions of 15% p.a as we expect the company’s revenue to remain intact as it expands. However, we have factored in higher tax rates c.22% (up from the effective 13.6% of FY12) as company foresees potentially lower RAs in the coming years.

 We are also reducing our FY13-14 NDPS forecasts to 2 sen (from 3 sen), in line with the current year payout.

Rating   Maintain OUTPERFORM

Valuation  Our new target price is RM0.64 (from RM0.61) based on an unchanged 6.5x FY13 PER.

Risks  Delays in projects execution or contracts award.

Source: Kenanga