Rotary Engineering haunted by financial deficit in SATORP JV

Here are 2 possible scenarios.

According to OCBC Investment Research, Rotary encountered several issues on its SATORP in-kingdom project, including design flaws, escalating costs and substantial re-work. After two quarters of steep cost over-runs, it now aims to achieve project commissioning by Oct-2013. However, the financial deficit at its 51%-owned SATORP JV is still unresolved.

Here's more:

Rotary’s non-controlling interest showed S$82m of deficit as of Dec-2012. In our view, if Rotary decides to continue participating in projects in Saudi Arabia under the same operating entity, the JV would need a capital injection.

Alternatively, if the JV is no longer relevant after the SATORP project ends, there is a risk of impairment for the deficit amount owed by its minority JV partner.

Rotary Engineering Ltd had a difficult year in 2012, as it battled escalating cost over-runs on its US$745m SATORP megaproject and repeated delays on its S$260m Fujairah Oil Terminal project. In 4Q12, the group appeared to be making progress on its SATORP project, although the non-controlling deficit is still a thorny issue.

The group recently secured S$42m of project work in Singapore’s Jurong Island, and S$300m of EPC work in Pulau Busing. However, the tighter foreign labour market in Singapore could mean lower project margins over the medium term horizon.

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