Not vested:-
FROM OCBC:-
1Q08 results a crowd pleaser. R H Energy Ltd (RHE) seems to have finally found its footing in 1Q08. Revenue rose 172.9% YoY to US$4.9m, while net profit surged from US$13,000 a year ago to US$1.1m, representing about 19% of our FY08 earnings estimate.
RHE's surge in revenue and net profit came mainly from its recent acquisitions under the Engineering, Consultancy and Inspection segment, which contributed approximately 69% of the group's revenue. While such inorganic growth provided a huge boost to RHE's 1Q08 earnings, RHE has clarified that its growth in the next 2 quarters will be driven by organic growth from the Equipment Integration segment.
Acquisitions led to a leap in profit margins. RHE recorded a significant leap in both its gross and net profit margins due to a change in product mix. Its gross profit margin swelled by 30.4ppt YoY to 66.0%, while its net profit margin rose 20.8ppt to 21.5%. However, this should not be taken as an indication of its overall margins for FY08. As mentioned above, the bulk of RHE's 1Q08 revenue was derived from its new acquisitions in the Engineering, Consultancy and Inspection segment. Such contracts tend to entail higher margins as these are service-oriented and do not require significant costs other than labour
costs. For the rest of FY08, we expect a moderation in overall margins as contracts from the Equipment Integration segment, the bulk of which will be recognised in 2Q and 3Q, tend to reap lower gross margins in the region of 20% - 25%.
Visible order book for FY08. RHE's outstanding order book for FY08 now stands at US$34.7m, of which approximately US$20.5m from its Puguang Gas Field projects will be recognised in 2Q08 and 3Q08. In all, these account for 82% of our FY08 revenue estimates. We understand that RHE is in the midst of negotiations for an additional Engineering, Consultancy and Inspection contract, which can start contributing to group revenue from as early as 2H08. As such, management is confident that it will meet, or even surpass our projections.
Keeping our BUY rating. Since RHE's outstanding order book is in line with our FY08 projections, we are keeping our estimates intact. Our fair value remains at S$0.365, pegged at 12x FY08 PER. Based on its last closing price of S$0.215, RHE remains a BUY with an attractive 68% upside.