EPC Players in Thailand

8/9/2019 EPC Players in Thailand

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OSK Research See important disclosures at the end of this report

THAILAND EQUITYInvestment Research

Daily

Initiation ReportThailand Research Team+66 (2) 862 9999 ext. 2030

Toyo-Thai Corporation (TTCL)Leading Contractor With Regional Presence

We initiate our coverage on TTCL with a BUY rating and TP of THB15.93, based on a

FY12 PER of 13.5x. The prospects of TTCL, which has maintained a strong track

record since its IPO, look brighter than ever. The companys competitive advantage

lies in its solid engineering team that has completed construction projects worldwide

at relatively low cost. Its strong alliances with construction giants from Japan and

South Korea should greatly enhance its overseas operations going forward.

BUYFair Value THB15.90

Price THB14.00

CONSTRUCTION

Toyo-Thai Corporation PCL builds petroleumfactories and also constructs chemical,power, and biodiesel plants. It hassubsidiaries in Vietnam, Malaysia, Myanmar,US, Abu Dhabi and the Philippines.

Stock Statistics

Bloomberg Ticker TTCL TBShare Capital (m) 480.00Market Cap (US$m) 22452 week HL Price (RM) 15.50 8.003mth Avg Vol (000) 1,689.78YTD Returns 18.64Beta (x) 1.05

Major Shareholders (%)

Toyo Engineering Corp. 26.0Thai NVDR 10.5

Chiyoda Corp. 7.0

Share Performance (%)

Month Absolute Relative1m -0.7 -4.53m -2.1 -10.36m 7.9 -6.212m 68.4 46.5

Share Price Performance

Bright prospects ahead. Toyo-Thai Corporation PCL (TTCL) is currently the only one in

Thailand that is able to independently provide integrated engineering, procurement,

construction (integrated EPC) services for petroleum and petrochemical projects worth

USD300m-USD500m. Unlike most Thai contractors, TTCL has a lot of room to grow in the

foreign markets since making its name regionally, especially in Vietnam and Malaysia. In

1Q12, the company earned THB2.2bn (+21.9% y-o-y) in revenue and a net profit of

THB111.5m (+5.5% y-o-y). At the end of the first quarter, its backlog was at a record high of

THB17.5bn, 55%-60% of which should be realized this year. Thus our FY12 projected

revenue of THB11.9bn is largely secured.

Quality engineers and cost management leaders. TTCLs engineers have lived up to

global standards. One of the companys most outstanding milestones was building the

worlds largest hydrogen peroxide (HP) plant for a joint venture between Dow Chemical

Company (USA) and Solvay (Belgium), both of which are among the worlds largest

international chemical firms. The projects EPC was implemented by TTCL under Solvayssupervision. The plant successfully kicked off production on 21 Aug 2011. TTCLs track

record in the EPC business is strong evidence that the company is entering the global stage,

where most competitors are from developed countries. This gives the company some

competitive advantage in terms of cost leadership since Thai engineers and staff command

lower salaries than their counterparts in developed countries.

Recommend BUY with TP of THB15.90 (+13.6% upside). We initiate coverage on TTCL

with a BUY recommendation and TP of THB15.90, which is based on an EPS of 1.18

(+41.8% y-o-y) and FY12 PER of 13.5x, which is close to its average trailing PER since

2009. As one of the countrys leading EPC contractors with strong alliances in Japan and

South Korea, the firm should be able to grow its construction business in both the domestic

and foreign markets, and stabilize its revenue by building and investing more in power plantprojects with its partners.

FYE Dec (THBm) FY09 FY10 FY11 FY12f FY13f

Revenue 10330.5 5318.1 8995.1 11846.8 17497.8Net Profit 325.5 337.1 399.7 566.7 734.0% chg y-o-y 4.2% 3.6% 18.6% 41.8% 29.5%Consensus - - - 567.0 755.7EPS (THB) 0.68 0.70 0.83 1.18 1.53DPS (THB) 0.42 0.34 0.40 0.59 0.76Dividend yield (%) 3.0 2.5 2.9 4.2 5.5ROAE (%) 31.7 23.2 25.0 31.1 34.0ROAA (%) 5.7 8.1 7.6 7.9 8.6PER (x) 20.6 19.9 16.8 11.9 9.2

BV/share (THB) 2.9 3.2 3.5 4.1 4.9P/BV (x) 4.9 4.4 4.0 3.4 2.9EV/ EBITDA (x) 16.68 16.43 16.23 13.39 12.79

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Feb-10 Aug-10 Feb-11 Aug-11 Feb-12


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COMPANY BACKGROUND

We estimate FY12 grossmargin at 10.8% andFY12 net margin at4.8%.

Only EPC contractor in Thailand with regional presence.Toyo-Thai Corp (TTCL), Thailands first all-

round engineering company, was incorporated in 1985 as a joint venture between Italian-Thai

Development Public Company Ltd, one of the largest contractors in Thailand, and Toyo Engineering Corp

(TEC), a leading international engineering company in Japan. TTCL is an integrated contractor that

provides engineering design, procurement of machines and equipment, and construction (integrated EPC)

for turnkey projects mainly in the petroleum, petrochemical, chemical and energy industries. In 27 years,

TTCL has undertaken over 190 projects building process plants and facilities in both domestic and foreign

markets. It expanded its international business in 1997, and has built plants in the United States, China,

Bangladesh, Vietnam and Malaysia. In 2009, the company was listed on the Stock Exchange of Thailand

with a registered capital of THB480m. Today, TEC holds about 26% of TTCL shares while the Ital-Thai

group owns a stake of about 8.85%.

Growing profit through peaks and troughs. As an integrated EPC contractor, TTCL focuses on

medium-sized projects valued from USD300m to USD500m. In FY11, revenue from petrochemical and

chemical projects accounted for 66.6% of total revenue while the remainder came from energy projects.

The company saw a substantial drop in revenue in FY10 (see Figure 1) as it was then heavily reliant on

clients that wanted to have their plants built in Map Ta Phut Industrial Estate (see Figure 6). Toward the

end of 4Q09, the Central Administrative Court ordered government agencies to suspend operation andconstruction of 76 projects in Map Ta Phut, 59 of which are in petrochemical, oil, gas, refinery and metals.

Ongoing construction was put on hold, with no new orders until September 2010 when the court allowed

most of the 76 industrial projects to resume. As a result, TTCLs FY10 revenue plunged 48.6% y-o-y,

although its net profit grew at a 30.3% CAGR from FY08 to FY11 (see Figure 1). To reduce the volatility in

its revenue, the company diversified its EPC business to foreign markets and started investing in power

plant projects, all of which TTCL has to be the main EPC contractor (see Figure 5: Evolution of TTCLs

Revenue). Apart from investing in power plants, the company also aims to add more power plant owners

to its list of clients, as evidenced by the composition of the potential projects, of which the value of six

power projects account for 44% (see Figure 8).

Figure 1: Revenue, gross profit and net profit Figure 2: Profitability

Source : OSK, TTCL Source : OSK, TTCLFigure 3: Revenue breakdown 2011 Figure 4: EBIT breakdown 2011

Source : Bloomberg Source : Bloomberg


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Investments will be inpower projects, all ofwhich TTCL has to bethe EPC contractor aswell.

Heavy reliance onprojects in Map Ta Phutis expected to becomethe thing of the past.

Figure 5: Evolution of TTCLs revenue

Source: Bloomberg, TTCL

Figure 6: Sample of projects done in the past

Note; Number of clients are in red, locations are in light purple, and project descriptions are in black.Source: OSK, TTCL

INVESTMENT HIGHLIGHTS

Bright prospects ahead. For petroleum and petrochemical projects worth USD300m-USD500m, TTCL is

unique in that it can provide integrated EPC services to clients without relying on other companies to work

jointly with. Unlike other Thai contractors, TTCL has a lot more room to grow in the foreign markets since

becoming well-known in the region. The firms backlog of THB17.5bn as of 31 March, 2012 is a record

high, with THB10.8bn (61.4%) from foreign markets, mostly from Vietnam and Malaysia. We expect about

THB9.6bn (55%) of the total backlog to be realized this year, bringing the FY12 revenue to THB11.9bn

(+31.7% y-o-y). Currently, the company has new proposed project worth THB80.6bn collectively. As such,

it should see strong growth in EPC services demand for the next two years as its backlog keeps growing

and the company begins bidding for bigger projects next year.

Stabilizing income via investment in power plant projects.The company has also started investing in

power plants, such as Navanakorn Electrics 110MW power plant and Siam Solar Powers 8MW

photovoltaic electrical plant for which it carried out the EPC. As of 31 March 2012, the company had

invested some THB750m in Navanakorns preferred shares. The eventual investment will be about

THB1.09bn by 1Q13 when it becomes operational, while the dividend to be paid (10.5% fixed rate) to

TTCL should come in by the middle of FY13. Siam Solars plant, 25%-owned by TTCL, should start

production by 4Q12. The company is currently in talks with investing partners to invest an additionalTHB1bn to THB2bn in four power projects. This type of investment is aimed at bringing in a stable income

stream in the long term.


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For potential proposals,there are 6 power, 12petrochemical and 1utilities projects.

TTCL is equipped withhigh quality and costleadership causingJapanese and Korean

firms to seek partnershipwith the company.

Figure 7: Backlog as of 31 March 2012 Figure 8: Potential project proposals

Source : TTCL Source : TTCL

Strong EPC track record. TTCLs truly live up to global standards. One of the companys major

milestones was building the worlds largest hydrogen peroxide (HP) plant for a joint venture between Dow

Chemical Company (USA) and Solvay (Belgium), which are among the worlds largest internationalchemical firms. The projects EPC was performed by TTCL under supervision by Solvay. The plant began

production on 21 Aug 2011. The EPC services for Phase 2 of this plant are also being conducted by

TTCL. Last year, the company was awarded EPC contracts by Lynas Malaysia SB in Malaysia and a

Vietnam National Chemical Groups subsidiary in Vietnam.

Competitive advantage = cost leadership. TTCLs EPC business track record is strong evidence that it

is entering the global stage dominated by competitors from the more developed countries. This gives it a

strong competitive advantage in terms of cost leadership since Thai engineers and employees command

much lower salaries than their counterparts in developed countries.According to the companys head of

finance, South Koreas wages in this industry are about one-half of the Japans, while Thai wages are only

one-third of South Koreas (over the last five years, TTCLs salaries, wages and other employee benefits

have, on average, accounted for 16.40% of total cost). Although wages around the globe are converging,it will likely take quite a while (i.e. at least 10 years) before Thai wages rise to levels comparable to those

in Japan and South Korea. Having realized this, several companies in South Korea and Japan are looking

towards partnerships and alliances with TTCL, knowing that such a relationship will enable them to offer

more competitive rates when they bid for projects. For example, Chiyoda Corp - the second largest EPC

contractor in Japan - acquired 7% of TTCLs issued shares in FY10 with the aim of working with the latter

to bid for projects of global scale.

Figure 9: TTCLs founders and alliances


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The excess cashaccounts for 13.8% ofthe current share price.

After the Map Ta Phutincident during 4Q09-4Q10 is over, TTCLsbacklog has risensubstantially.

Flush with liquidity. The companys enormous cash reserves and short-term investments, making up

58.4% of total assets as of 31 March, reflect its highly liquid position. However, most of the cash cannot

be deemed excess cash a proportion of it was from deferred revenue and customer advances for

construction contracts, implying that much of it will need to be utilized to cover operating working liabilities.

In calculating excess cash, we found a negative difference between operating working assets and

liabilities, with the former coming up THB3.5bn short. If TTCL uses cash to cover the shortfall, it would still

be left with THB934.2m in cash and short-term investments of THB1.95 per share (which is 13.9% of its

share price). In addition, it currently has no interest-bearing debt to pay off.

Figure 10: Excess cash at the end of 1Q12

Backlog leads revenue upwards. We are optimistic on TTCLs outlook this year and the next. As of 31

March 2012, the company had a record high backlog of THB17.5bn, 55% of which we expect the

company to realize this year (as opposed to the 60% estimated by TTCL), boosting our projected FY12

revenue to THB11.9bn (+31.7% y-o-y) and FY12 earnings to THB567m (+41.8% y-o-y).

Figure 11: Backlog and revenue

Source: OSK, Bloomberg


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Number of projects inthis table representsthose that would actuallygo through auctionsduring 2H12 or 1Q13.

Global slowdown to have limited impact on FY13 performance. We believe the impact of global

economic uncertainties, including the European debt crisis and Chinas slowdown, on TTCLs FY13

performance is likely to be limited. This is because the EPC projects on average take two-and-a-half years

to complete. Project owners, while planning their investments, consider economic conditions two to three

years forward when their plants become operational rather than on the prevailing economic situations.

However, a few project owners, especially those in the petrochemical industries, might postpone their

investment until the global economy is on more solid ground, and commodities prices start to pick up.

This leads us to the scenario analysis below.

Figure 12: FY13f revenue from construction and services

under different scenarios

Source: OSK

Base-case scenario: FY13f sales of THB17.435bn. Our worst-case scenario suggests FY13f sales of

THB15.13bn, and the best-case scenario suggests sales of THB18.62bn (see Figure 12 above). There

are two main assumptions: first, that the auctioning of all six power plants worth about THB36.6bn will go

ahead as planned since decisions to build power plants are not affected by current economic conditions,

as such facilities take at least two years to build. Second, we assume that TTCL will be able to garner

about a third of the projects it plans to bid for, based on the five-year average rate. Nevertheless, our

base-case scenario is that THB71.7bn worth of projects (out of THB80.6bn) will actually go through

auctions during this year and 1Q13, in which case the company will have FY13f sales of THB17.435, up

by 32.5% from FY12f.

Recommend BUY, TP THB15.90 (+13.6% upside). We initiate coverage on TTCL with a BUY

recommendation and TP of THB15.90, based on a FY12 PER of 13.5x and FY12 EPS of 1.18 (+41.8% y-

o-y). The estimated FY12f PER is almost identical to the companys average trailing PER since 2010

(13.4x) and close to the average of forward FY12f PER of comparable companies (13.3x), including those

of Samsung Engineering, Chiyoda, JGC, CTCI and PEC. All of these companies are integrated EPCs

which build projects similar to TTCL. With its global standards and cost advantage, the company is

prepared to grow as it has set up subsidiaries in a number of countries including Vietnam, Malaysia,

Myanmar, US, Abu Dhabi and Philippines. As Thailands only EPC contractor with a regional presenceand strong alliances in Japan and South Korea, the firm should be able to grow its construction business

in both domestic and foreign markets, as well as stabilize its revenue by building and increasing its

investment in power plant projects with its partners.


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Samsung Engineering,Chiyoda, JGC, CTCIand PEC are

comparable companiesas they build similartypes of projects asTTCL does.

The Philippines office

was just set up in May,2012.

Figure 13: Regional EPC* contractors (as of 11 July, 2012)

Note: Forward PER (2012) for regional contractors are supplied by Bloomberg and based on consensus of FY12 EPS.Source: OSK, Bloomberg

*E= Engineering design, P = Procurement, C = Construction

Figure 14: Valuation (as of 11 July 2012)

Source: OSK, Bloomberg

Figure 15: Historical trailing PER (as of 11 July 2012)

Source: Bloomberg

Figure 16: Subsidiaries and new business development

Source:TTCL


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EARNINGS FORECAST

FYE Dec (THBm) FY09 FY10 FY11 FY12f FY13f

Turnover 10330.5 5318.1 8995.1 11846.8 17497.8EBITDA 497.0 488.5 585.3 770.0 957.3PBT 475.7 467.7 563.8 741.3 924.1Net Profit 325.5 337.1 399.7 566.7 734.0EPS (THB) 0.68 0.70 0.83 1.18 1.53DPS (THB) 0.42 0.34 0.40 0.59 0.76

MarginEBITDA (%) 4.8 9.2 6.5 6.5 5.5PBT (%) 4.6 8.8 6.3 6.3 5.3Net Profit (%) 3.2 6.3 4.4 4.8 4.2

ROAE (%) 31.7 23.2 25.0 31.1 34.0ROAA (%) 5.7 8.1 7.6 7.9 8.6

Balance SheetFixed Assets 59.3 98.3 127.1 187.2 235.1Current Assets 4472.7 3378.1 6097.4 5965.2 7214.3Total Assets 4607.5 3675.0 6903.6 7440.5 9615.7

Current Liabilities 3227.8 2125.5 5009.4 5225.3 7024.8Net Current Assets 1245.0 1252.6 1088.0 739.9 189.4LT Liabilities 0.16 13.59 212.05 224.90 228.93Shareholders Funds 1,379.5 1,535.9 1,682.2 1,990.4 2,361.9Net Gearing (%) Net Cash Net Cash Net Cash Net Cash Net Cash

Cash FlowPBT 475.7 467.7 563.8 741.3 924.1Other Operating Cash - - - - -Chg in Working Capital 1673.0 833.5 -1774.0 235.9 -419.1Operating Cashflow 1200.8 -532.2 2238.3 340.8 1141.4CAPEX 57.7 171.3 510.7 695.6 960.0FCF -1382.4 -646.2 1688.5 -332.0 231.6


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Documents

EPC Players in Thailand