STEC to Outperform with Secured ฿78bn Worth of Backlog, Analyst Recomm TP at ฿21.40

KGI Securities (KGI) has made an analysis on Sino Thai Engineering and Construction Public Company Limited (STEC), maintaining a rating of Outperform with a 2020 target price of ฿21.40/share.

 

KGI expects STEC to report 1Q20 core earnings of ฿333 million (-2.9% YoY, -34.5% QoQ). Earnings should be flat YoY due to increasing revenue and equity income almost offsetting a decline in gross margin. The decline QoQ would be due to high base for equity income from MRT Pink and Yellow lines. KGI expect a short-term negative impact to guide way beam installation of MRT Pink and Yellow lines. STEC’s current backlog of ฿78 billion would secure revenue for about 2.5 years if there is no new backlog. Short term new backlogs would be from U-Tapao Airport City (฿20 billion), MRT Pink Line extension (฿2.5 billion) and Motorway O&M (฿5-6 billion).

 

Gross margin is expected to be maintained at 5.0% (4.5% in 4Q19 and 7.3% in 1Q19). SG&A/sales is expected to increase from 1.1% in 4Q19 to 1.3% due to advisory fees related to the U-Tapao Airport City contract negotiation. If 1Q20F earnings are in line with the forecast, STEC would account for 24.9% of KGI full-year forecast.

 

Some negative impact on guide way beam installation on MRT Pink and Yellow lines

KGI expects the imposed curfew (10:00 pm – 4:00 am) since April 3 to raise some difficulties in the guide way beam installation for MRT Pink and Yellow lines, which had been installed during the night. However, Mass Rapid Transit Authority of Thailand (MRTA) already adjusted its construction plan by i) shifting logistics to daytime, ii) changing the time on the night shift from 10PM to 7PM. Currently only 33.9% and 41.7% of the guide way beams have been installed on MRT Pink and Yellow lines, respectively.

 

Resilient backlog against expected delay in public projects bidding

STEC has a current backlog of ฿78 billion which would secure revenue for approximately 2.5 years. There would be short-term backlog upside from U-Tapao Airport City Phase 1 (฿20 billion), MRT Pink Line extension (฿2.5 billion) and Motorway O&M (฿5-6 billion). KGI expects BBS consortium to sign the U-Tapao Airport City contract by 1H20.

 

Valuation & Action

KGI maintains a rating of Outperform with a 2020 target price of ฿21.40/share based on PER 25x (LT PER+1SD). STEC is our top pick in the contractor sector due to i) resilient backlog of ฿78 billion together with strong financial position (cash on hand of ฿5.3 billion as of 4Q19), ii) potential backlog from MRT Orange Line West (approximately ฿80-90 billion in civil work, expected to launch TOR in 1H20). KGI expects STEC to partner with the same consortium (BGSR consortium).

 

Risks

A delay in construction schedules, labor shortage and rising material costs.