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● Simplex’s 1Q12 recurring PAT at Rs287 mn declined 21% YoY
but was 7% ahead of our estimates. Positive surprise was driven
by EBITDA margin at 10.1%, marginally ahead of our estimates
and slightly lower than the expected tax rate.
● Domestic sales grew by 16% YoY; the decline in international
sales was key reason for weak sales growth. Besides, the
continuation of high working capital cycle (121 days net of cash)
and rising cost of debt at 9.85% during 1Q12, resulting in net
interest expenses being up 56% YoY, led to weak profits.
● The company has guided to 10% sales growth, Rs80 bn of order
inflow and EBITDA margin at 10.3–10.5% during FY12. However,
our estimates are slightly conservative. We thus expect a tepid
3% YoY earnings growth during FY12.
● Led by slower sales growth, the continuation of high working
capital cycle, weakening ordering activity and rising interest rates,
we cut our earnings for FY12 by 18% and for FY13 by 27%.
Consequently, we cut our target price by 15%, to Rs321, and
maintain our NEUTRAL rating on Simplex.
1Q12 marginally better than estimates
Simplex Infra’s 1Q12 recurring PAT at Rs287 mn declined 21% YoY but
was 7% ahead of our estimates. Positive surprise was mainly driven by
EBITDA margin at 10.1%, marginally ahead of our estimates and slightly
lower than the expected tax rate. 1Q12 results were weak, mainly hurt by
tepid international sales (10% of sales), the rising cost of debt and the
continuation of higher working capital cycle. Domestic sales (90% of
sales at Rs11.3 bn) growth was reasonable at 16% YoY. Including Rs70
mn of stamp duty paid during the quarter for one of its project under
arbitration, reported profit at Rs241mn declined 34% YoY.
Ordering activity slow, expect order inflow at Rs80 bn
The company acknowledged that the new ordering activity has
weakened, the quality of bids/competition is deteriorating and the
conversion of bids into orders has also slowed. However, Simplex has
well diversified operations based on business segments (buildings and
housing; power and urban infra are the largest segments constituting
64% of order book), mix of private sector (59% of order book),
government sector (31% of order book) and PPP projects(10% of order
book) and national (86% of order book) versus international operations.
Based on this, the company expects to maintain flat order inflow YoY
during FY12 at Rs80 bn; translating into order book at Rs180 bn (20%
YoY growth) and sales growth of about 10%. Order inflow during 1Q12 at
Rs8.6 bn was very weak; however, it improved in July 2011 with Rs12.7
bn of new orders won. The company has currently bid for projects worth
Rs320 bn in the domestic market, Rs40 bn internationally and is
negotiating for a further Rs40 bn orders with the private sector.
Expect tepid earnings growth during FY12
Given its high share of contracts with escalable clauses (85% of order
book) and improvement in international operations, the company expects
to maintain its EBITDA margin during FY12 at 10.3–10.5%. However, we
believe these estimates are slightly aggressive and build 9.8% EBITDA
margin for FY12 in our estimates. We expect working capital cycle to
remain high and the cost of debt to increase further; it has already gone
up from 9.85% in 1Q12 to 10.2% in August 2011. Led by our estimates of
8% YoY sales growth, high working capital cycle and interest rates, we
expect tepid earnings growth at 3% in FY12.
Cut EPS 18–27% over FY12–13E, lower target price to Rs321
Led by slower sales growth, weakening ordering activity, continuation
of high working capital cycle and rising interest rates, we cut our
earnings for FY12E by 18% and FY13E by 27%. Consequently, we
lower our target price by 15%, to Rs321 from Rs376, and maintain our
NEUTRAL rating on Simplex.
