Rotary Engineering Ltd

BUY: Price $0.765 Target $1.10

Initiating Coverage

Analyst: Sebastian HENG

Poised for takeoff

♦ Rotary well positioned to ride the coming wave

Rotary ranks as one of Singapore?s most established home grown

engineering companies � with a track record of more than 30 years. Over the

years, it has evolved from a sub-contractor into a multi discipline, regional

turnkey, Engineering, Procurement & Construction (EPC) player in the oil &

gas industry with 3000 employees under its wing. It is also a preferred

engineer on the panel of leading refinery players like Shell and Exxon Mobil

and looks set to benefit from the impending increase in downstream and oil

terminal capital expenditures in Singapore and the region.

♦ Expected increase in downstream spending augurs well for

Rotary

In Singapore, Shell is building a US$3b petrochemical cracker with the start

up of the new facilities expected by 2009/2010. ExxonMobil is also looking to

increase capacity and is planning to add a second comparable cracker unit to

the current one. Investment is expected to be confirmed probably in FY07. A

total of US6-8b in capex could be added to the Singapore oil refinery sector

over the next few years. International Energy Agency (IEA) estimates that

new-build cracking refinery cost has risen from around US$3.0bn to

approximately US$4.0bn for a 200 kb/d refinery and that the refinery

construction firms have full order books for the next three years. Although a

total of some 15.1 mb/d (equivalent of US$302b) of new capacity has been

announced for completion before 2011, there is risk of delays. Refinery

capacity growth is centred on Asia (4.6 mb/d), the Middle East, (2.6 mb/d)

and North America, (1.4 mb/d). Rotary is poised to benefit from these flows.

♦ Operating leverage will expand margin

Rotary?s operations offer good scalability and affords the group strong

operating leverage. Implication is that orders and revenue can be scaled up

rapidly while keeping overheads fairly constant. We are forecasting pretax

margins to expand from 6.5% in FY05 to 10.1% in FY06.

♦ An affordably priced O&G play; initiate with BUY

Rotary remains a relatively under researched stock and one of the better

proxies to the region and Singapore?s increasing refinery/oil terminal capex

cycle. We believe Rotary deserves a minimum ex-cash multiple of 10.9x

2007 PE, (low end of peers) which translates to a target price of S$1.10. We

initiate coverage with a BUY recommendation.

Source: Kim Eng Securities Research