US$0.7bn estimated contract. On 16 June 09, Saudi Aramco Total Refining and Petrochemical Company (SATORP) finalized the awarding plan for Engineering, Procurement and Construction (EPC) contracts that constitute the 13 different process packages of its Jubail JV refinery. The 400,000bbl/ day full-conversion refinery in Jubail, Saudi Arabia plans to be fully operational by the 2H13. While news flow has indicated that SATORP will only be sending out letters of intents to the awarded contractors this week, MEED.com, a middle eastern newswire has indicated that Rotary Engineering's (Rotary) 51% owned subsidiary (49% by Rafid Group), Petrol Steel, has won the refinery tank farm package. While official figures are not yet available, we estimate it to be worth US$700m.

JV is a double edged sword. Besides having a strong track record and a ready facility in Jubail, the collaboration with Saudi Arabia based Rafid Group undoubtedly gave Rotary a favourable edge in winning the package. However, this would mean that the positive financial impact would be diluted. Moving ahead, good execution on this project would position Rotary to win more projects in the Middle Eastern region.

Anticipating more in the pipeline. Although the SATORP project was a key catalyst for Rotary, we believe that the group was and will still be pursuing projects in Singapore and the region to fully utilise its 7000+ global workforce staff. Management indicated that there were still some substantial projects (>S$100m) that are up for tender in the region during the last results briefing. We have catered for project wins of about S$175m and S$185m in FY09F and FY10F, respectively.

Upgrade to BUY. Although Rotary has yet to receive official confirmation of the contact, the likelihood of winning is high. We have factored the US$700m project to span 4 years from 2010 to 2013. We have assumed gross margin for EPC to start to edge upwards to reach a peak of 22% in 2011 when the project will most likely be running at maximum efficiency. However, the longer time span will have a less accentuated effect on the earnings impact as the Singapore based S$535m Universal Terminal that only spanned about 2 years. While we have rolled our valuation forward to FY10F, we have maintained our peg at 8x. If the terms of contract are better than our expectations, the stock could be positively re-rated (note: Rotary traded up to 18x in 2007). Upgrade to BUY with fair value of S$0.81 (prev. S$0.51).