Rotary's crazy S$66m loss wipes out past gains

7 glorious quarters went to waste.

According to OCBC, in 3Q12, Rotary reported a hefty net loss of S$66m, mainly due to “additional costs, including provisions for foreseeable losses of S$40m” for its SATORP project.

Here's more from OCBC:

This effectively wiped out its previous seven quarters of profits. The results also followed a disappointing 2Q12, when it booked in only S$1.0m of net profit, down 90% YoY, on S$23m of losses for the SATORP project.

As a brief recap, the SATORP project encountered several inter-related difficulties, including design flaws, escalating subcontracting costs, work sequencing issues and harsh working conditions, resulting in the cost over-run situation.

The original civil subcontractors responsible for the construction work were unable to cope with the schedule, and additional subcontractors had to be appointed at higher costs.

There were also changes to engineering design that resulted in major civil re-work. In addition, piping and electrical and instrumentation activities were also affected due to work sequencing.

As an update, management assured us it is working hard to rectify these issues and “things are now under control”. It is determined to complete the job to maintain its reputation, even if it meant incurring more expenses. Accordingly, it has re-assessed the project budget and made the necessary provisions.

Despite the recent sell-down, we feel it may still be too early to turn positive. Rotary is under time constraint to complete the SATORP project by end-2012 and the cost over-run may worsen due to the shortage of subcontractors in Saudi Arabia.

In addition, it may need to recapitalize its 51%-owned JV that is currently working on the SATORP project. (Note: Rotary’s non-controlling interests showed S$65m of deficit as of end-Sep 2012). Maintain SELL with fair value estimate of S$0.34 (on 0.8x FY13F BPS).