Sino-Thai Engineering & Construction

May lose the Red Line to ITD BUY (maintained) Target Price: Bt14.00 Price (09/02/12): Bt13.00

Sino-Thai Engineering & Construction (STEC)

What’s news? Rumors have been circulating that STEC may lose the Red Line first package, which is worth around Bt35bn, to ITD (the second-lowest bidder)—the 60:40 JV between STEC and UNIQ declined to reduce its offering price of Bt34.65bn to the SRT's reference price of Bt31.77bn.

Note that the first package comprises the Bangsue hub station, a maintenance depot, a 6km-long elevated train structure and a second station. The second package worth Bt18bn includes a 20km elevated train structure with eight stations. The third package worth Bt20bn comprises rail installation, signaling and a power system. Construction should take 4-5 years to complete.

Comment: If the SRT cannot accept the JV's offering price, it has two options: 1) negotiate with ITD (the second-lowest bidder) or 2) rebid the contract package. If ITD were to take the reference price, there would be substantial risk of it making a huge loss—the reference price is too low, as it is based on post-2008 crash building material prices. If the SRT were to choose to re-open the contract to tender, it may eventually increase the reference price. Problems would arise if the new reference price were to be higher than STEC’s current offering price.

There isn't any impact on our earnings projection, as we hadn't factored the project into our model. In our view, losing the Red Line would be a far preferable scenario to losing money (as STEC almost invariably would if it agreed to take the reference price). Regardless of the Red Line, we still expect the firm to post robust earnings growth for the next two years. Moreover, STEC should secure work on a pre-assembly module for an LNG plant in Australia in 2H12. We estimate the sub-contract value (from STPI) in the Bt7.0-8.0bn range. Project GM should be 10-15%, which compares well against the miserly 6-7% for the Red Line.

Action: STEC's share price fell 3.7% yesterday, while ITD's share price rose 2.7%. The two stocks' price movements present an opportunity to BUY STEC (target price: Bt14) and SELL ITD (TP: Bt2.96).