This article first appeared in The Edge Financial Daily on November 14, 2019

Rohas Tecnic Bhd
(Nov 13, 69.5 sen)
Upgrade to buy with a higher target price (TP) of 79 sen: Legacy projects that contributed to Rohas Tecnic Bhd’s poor financial year 2018 (FY18) results are completed and are not expected to impact its financials going forward. Normalised earnings of HG Power Transmission Sdn Bhd (HGPT) should amount to about RM10 million per annum based on the management’s guidance.

Rohas has submitted its tender for a transmission line from Butterworth to Penang Island which will run parallel to the Penang Bridge (estimated project value: RM1 billion). There are five bidders: from China, India, Australia, Rohas Tecnic Bhd-Muhibbah Engineering (M) Bhd and MMC Corp Bhd-Malaysian Resources Corp Bhd. The joint venture structure between Rohas and Muhibbah has not been fixed but will likely be based on the job scope breakdown (civil marine works will be less than 50% of the project value). Having undertaken the widening of Penang Bridge before, we reckon Muhibbah is a good partner for Rohas (which will then undertake the transmission line portion of the works). Tenders will close end of November with awards likely in the first quarter of financial year 2020 (1QFY20).

Tower division outstanding order book currently stands at about RM230 million, translating into 1.5 times of FY18 tower revenue. Engineering, procurement, construction and commissioning (EPCC) order book stands at RM420 million, translating into 1.8 times of FY18 EPCC revenue.

Phase 1 of Sarawak telecommunication towers has been rolled out with Rohas securing fabrication contracts for 130 out of 300 towers tendered with an estimated value of RM19.5 million (RM150,000 per tower). Earnings contribution (about RM3 million in profit after tax) should flow through in 4QFY19 as deliveries must be made by end of November.

Rohas’s 49%-owned mini hydropower plant in Indonesia is expected to start contributing in FY20, a delay from the 2QFY19 due to the unusual raining season. Management guides that the earnings contribution to Rohas is expected to be about RM4 million annually. Its 40% loss-making Vietnam associate owns a 40 million litre per day water treatment plant (WTP) with an 80 million litre per day intake capacity. The mismatch leads to higher depreciation cost relative to the amount of water they can sell.

We raise FY20-21 earnings by 10-14% (FY19 unchanged) after imputing contribution from the Vietnam EPCC job (US$15 million[RM62.25 million]) and HGPT earnings recovery.

We upgrade to “buy” with a higher TP of 79 sen (from 57 sen) following the earnings adjustments. We reckon with the completion of its legacy contracts, earnings should grow sequentially driven by better margins at HGPT, new EPCC jobs and stronger tower orders. TP is pegged at 12 times price-to-earnings multiple (from 11 times) to FY20 earnings to reflect an overall improved outlook. — Hong Leong Investment Bank Research, Nov 13