Middle East exposure hurts Eversendai’s prospects

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Eversendai Corp Bhd
(Dec 23, RM0.51)

Maintain “neutral” with a lower target price (TP) of 54 sen from 73 sen previously based on eight times (from 10 times) revised financial year 2015 forecast (FY15F) earnings per share, at a discount to our one-year forward sector target price-earnings ratio of 10 times to 16 times. This is because Eversendai’s earnings risk has risen, given its Middle East exposure. 

The recent collapse in crude oil prices will have a negative bearing on oil wealth, and hence impede the ability of certain oil-exporting countries in the Middle East to continue with their spending on lavish projects. 

This does not augur well for Eversendai, which derives about 80% of its revenue and 50% of its profits from the Middle East. Its current order backlog of RM1.6 billion will only lend earnings visibility over the next 18 months.

We cut our FY15F and FY16F earnings by 8% and 21%, respectively to factor in a lower job win assumption of RM800 million per annum (from RM1.2 billion).

While we acknowledge that Eversendai is a globally competitive structural steel contractor, it needs to more effectively monetise its strengths before a stock rerating can ensue. — RHB Research, Dec 23

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This article first appeared in The Edge Financial Daily, on December 24, 2014.