Weak earnings outlook in the short-term

ITD’s share price has fallen 23% since our December 6 report recommending investors to sell the stock. In the short-term we remain bearish on ITD prospects due to its shrinking backlog, slow progress in winning new contracts and delays to the New Bangkok International Airport (NBIA).

We have revised down our 2002 forecast for ITD’s normalised earnings by 5% to Bt549mn. We have also cut our 2003 projection by 17% from Bt781mn to Bt649mn and reduced our estimate for ITD’s fair value from Bt22 a share to Bt19.

Although we maintain our SHORT-TERM SELL rating on ITD, the stock does have attractions for long-term investors. The company is one of Asia’s most competitive construction contractors, and has a strong track record of winning lucrative projects, both in Thailand and in the region. Also, ITD has completely restructured its balance sheet, prompting the Central Bankruptcy Court to lift its rehabilitation status last month.

ITD is currently trading on a 2003 PER of 10x. This looks expensive against its historical average of 6-9x before the 1997 economic crisis. Having nearly halved since its 2002 peak last June, ITD’s share price has clearly discounted much of the bad news. However, we see little prospects of any sustained recovery soon given the company’s lacklustre earnings prospects over the next two quarters.

Backlog of work continues to shrink

Based on its backlog of work reported last December, ITD’s work on hand declined from Bt44.2bn last June to Bt37.4bn at end-2002. ITD signed new contracts worth Bt736mn during this period compared to an average of Bt2bn in new contracts over the last two years. ITD, however, is expected to win a Bt1bn project for Gili Gill Resorts in the Maldives given that it has tendered the lowest bid. In 4Q02, ITD’s main revenues came from track doubling for the State Railway of Thailand, Taiwan’s high-speed railway, and highway projects in northern Thailand. The road and track doubling works are civil-based projects and earn relatively low margins. High-margin projects are the Bangkok subway and Taiwan railway.

Slow progress on Bangkok airport project

The company last year recorded disappointing revenues of about Bt692mn from its work on the New Bangkok International Airport (NBIA) for which it has secured contacts worth Bt14.4bn. This fell well short of earlier estimates of Bt1.8bn following bureaucratic delays. As the company has still not received blueprints for the project, work is unlikely to begin for at least thee to six months.

ITD has completed 50% and 31% of the value of its large and smaller projects by end-2002. High-margin projects such as the Bangkok subway system and Taiwan high-speed railway are near completion while ITD’s smaller projects are mainly civil engineering works on highways and bridges and do not offer attractive margins.

Normalised earnings forecasts revised down by 5% in 2002 and 17% in 2003

We have revised down our 2002 forecast for ITD’s normalised earnings by 5% to Bt549mn. We have also cut our 2003 projection by 17% from Bt781mn to Bt649mn due to ITD’s shrinking backlog, delays to the NBIA project and narrower margins from the rising price of construction materials. We have reduced our operating margin estimates for 2002-2003 by 0.5% and 1.1% to 4.0% and 5.2% respectively. ITD should report net profits of Bt6.1bn in 2002, but about Bt5.5bn of this will come from gains on debt restructuring.

In 4Q02, ITD is projected to report only Bt7mn in net profits and Bt40mn in normalised earnings. We expect to see ITD’s revenue falling to about Bt4bn, with gross margins slipping below 10%. We expect more weak results from ITD during the first half of 2003.