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3 Takeaway From Rotary Engineering’s 2Q14 Results Briefing
1H14 Earnings
Rotary Engineering recorded a 70.3 percent surge in revenue for 1H14, stemming from increased business activities as execution of its major projects gained momentum.
In 2Q14, on the back of improvements in the level of productivity and cost control measures, gross profit margin has come in at the higher range of 17 percent based on the guidance provided by Rotary (12 to 18 percent).
Consequently, its 1H14 net profit expanded more than three-fold to $27.4 million.
High Revenue, Order Book Starting Afresh
Revenue recognition accelerated in 1H14 to reach $390 million as execution of projects in Singapore and the Middle East picked up pace. Most of the projects in the company’s order book are on schedule to be completed in 2H14.
With most of the projects nearing completion, management has shared that they are engaged in ongoing negotiations and tendering proposals for projects in Malaysia as well as the Middle East. In addition, the company continues to see good opportunities in the ASEAN and the Middle East.
The company’s good track record has also attracted several interested parties submitting enquiries. The management has also revealed that the absence of contract win announcements in the first half was partially attributed to the delay and deferment in awarding of several projects.
While the company is open to taking up projects of various sizes, management has emphasised that it is the profitability rather than scale of the project that matters the most, as profitability will directly impact gross profit margin.
Although no new projects have been announced, should any new deals be sealed, this would be a positive catalyst for the company in 2H14 onwards.
Improving Gross Margin
The improvement in gross margin also represented a 5 percentage points growth compared to a gross margin of 12 percent that was registered in the corresponding quarter last year.
Noting on the 3 “M”s that contribute to the majority of its cost of goods sold, namely manpower, materials and inputs as well as machineries and equipment, the group will remain laser-focused on taming these three pillars of costs.
As a result, the group is confident that gross margin would range between 15 and 18 percent moving forward.
When asked on how the tightening of foreign labour affects its operations in Singapore, Rotary has responded that there has been minimal impact on them despite having a headcount of 7,000 workers (both local and foreign) within the group.
This is because the group has continuously been placing its emphasis on improving labour productivity through the enhancement of workers’ skillsets through training, rather than being dependent on a large pool of labour supply for its operations.
Growing Cash Hoard
Sitting on a cash hoard of $214 million, this yields a net cash position of $165 million after deducting $49 million in total borrowings for Rotary.
When measured against its total assets of $464.3 million, this considerable amount of cash did not go unseen as questions were directed to Rotary’s management on its plan to utilise its cash.
Rotary explained that part of the cash position is reserved for its operations as the business landscape has shifted towards a trend where projects awarded to the group require an equity investment on its part. As such, the additional cash on the group’s balance will be handy for such investments.
Secondly, part of the cash position would then be channelled into the potential acquisitions of other companies. The group noted that it aims to be cautious when considering merger and acquisitions activities by only making acquisitions of smaller scales, and targeting companies that are synergistic to its existing business.
Finally, Rotary shared that it is also considering organic growth through its foray into new business segments. At the moment, the group is considering to venture into the offshore and marine sector as well as a new sub segment within the oil and gas sector, specifically liquefied natural gas.
While entering into new business segments could be beneficial to the group’s topline amid a shrinking order book, the group may face headwinds penetrating these newly identified markets, which it has not previously operated in.
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