Rotary Engineer's revenue fell 16% to S$444m

Tight labour market remains a key threat.

According to OCBC Investment Research, Rotary Engineering Limited's FY12 revenue was down 16% to S$444m, while loss attributable to shareholders was S$80m, compared to profit of S$31m in the previous year.

OCBC adds, the company reported a second consecutive quarter of losses with 4Q12 net losses to shareholders of S$18m (3Q12: S$66m). 

Here's more:

Last quarter was marked by additional provisions made for its SATORP project and lower volume of work due to the late start of Fujairah Oil Terminal (FOT) project. 

While SATORP execution issues appear to be largely resolved, the deficit at its JV remains a potential risk to shareholders. As a brief recap, Rotary had encountered several issues relating to its SATORP in-kingdom project, including design flaws, escalating costs and substantial re-work.

After two quarters of steep cost over-run, it now expects to complete all the major works by Apr 13 and commissioning by Oct 13.

However, the financial deficit at its 51%-owned SATORP JV is still unresolved. (Note: Rotary’s non-controlling interest showed S$82m of deficit as of end Dec-12.)

In our view, if Rotary decides to continue participating in projects in Saudi Arabia under the same operating entity, the JV would need a capital injection.

Alternatively, if the JV is no longer relevant after the SATORP project ends, there is a risk of an impairment loss for the deficit amount owed by its minority JV partner. 

Another concern is the tight labour market in Singapore, which represents about 50% of Rotary’s order-book.

While there is no change in the dependency ratio (for the construction sector), the increase in worker levies and tighter man-year entitlements would likely depress project margins.