Analyst Expects STEC’s Recovery in 2021, Giving a TP at ฿18

Maybank Kim Eng Securities (Maybank) has given a target price on Sino-Thai Engineering and Construction Public Company Limited (STEC) at ฿18/share, believing the earnings to recover in 2021 as it will recognizing revenue from GULF power plant in Pluak Daeng. 

       

Investment theme

Prosecutors decline to file charges against STEC in a case for supporting bribery at Khanom power plant, in which the National Anti-Corruption Commission (NACC) has found grounds to the accusation on 13 Nov 2019. It is likely the NACC will prosecute by itself which will make the case weaker. We expect the share price to positively respond to this issue. STEC’s current share trades on 1.4x P/BV, below the 10-year Forward P / BV-2SD at 1.5x, with a high cash on hand of THB4b. TP is THB18, based on 10-year average Forward P/E = 25x, TRADING BUY on weakness.

 

Prosecutor decline to file charge against STEC  

On 13 Nov 2019 the NACC has found grounds to the accusation that four senior local officials demanded a THB20m bribe from Mitsubishi Hitachi Power Systems Co, Ltd, a Japanese firm building a power plant in Nakhon Si Thammarat, in exchange for allowing oversized ships to use a port. The NACC’s investigation also found evidence to prosecute STEC and two of its executives for supporting the four officials in receiving the bribe. Recently, the Issara news agency reported that according to a high-ranking official from the NACC office, the prosecutors agreed to sue only 5 public and private officials, but not two private ones for supporting; STEC and its Managing Director. It is expected that it will be brought into the meeting of the NACC to consider the prosecution itself, all because the NACC sees it as an action that is linked. If only partially sued, the case should weaken.

 

No charges against STEC, case weakening   

Although the NACC has found grounds to the accusation on 13 Nov 2019, the court has not yet ruled. As a result, STEC continues to operate normally and is able to bid for projects. And given prosecutors decline to prosecute STEC and executives, the case should become weak.   

 

2020 earnings to collapse, recover next year

STEC has a backlog of THB70b. It should gain additional projects in the future, including the first phase of U-Tapao Airport with THB20b of civil works. When combined with the Motorway’s O&M work of THB5-6b and the Pink Line extension to Muang Thong with THB2.5b construction work, STEC should have a backlog of more than THB100b. This year’s earnings may drop to THB764m (-49% YoY) but should recover to THB1.11b (+45% YoY) next year as it will start recognizing revenue from construction of GULF power plant in Pluak Daeng, worth THB9.223b and the government building project completed. Gross margin should improve better next year vs this year.

 

Risks: Construction problems, cost of construction materials and labour problems. NACC ruling for wrongdoing.