SGX Stock Targets :: Your One Stop Analyst Reports Blog

We expect capacity utilization at Elec and Eltek ("ELEC") to have improved sequentially from 84% in 1Q07 to about 90% in 2Q07. Revenue in the June quarter should therefore record sequential growth from US$123.2m in 1Q07. However, sub-optimal production yield at ELEC’s Kaiping plant that was highlighted in our previous report may still be an issue in 2Q07.

2Q07 net profit may fall short of our forecast. We expect 2Q07 revenue to be in-line with our forecast of US$132.2m. Net profit in the second quarter may fall short of our estimate of US$10.4m, as gross margins may be lower than our 18% assumption due to yield issues mentioned above. In fact, gross margin could still be in the 15% to 15.5% range (15.2% in 1Q07), in which case 2Q07 net profit would only be approximately US$7.3m compared to US$6.6m in 1Q07. The current production hiccup at Kaiping is temporary. We expect full resolution by end 3Q07, which is later than what we had anticipated earlier. Therefore, full-year gross margins may be lower than our earlier estimate of 17.9% (probably closer to 16.5%), and net profit should also decline more than our earlier forecast of -25% YoY to US$43.3m. We expect ELEC to pay out 60% of its FY07 net earnings, or 14.5 USD cents per share, for a dividend yield of 7%. Actual payout should be slightly lower as we are likely to revise downwards FY07 EPS estimates after 2Q07 results have been released sometime in mid-August.

Undervalued but still a Hold. We continue to believe that ELEC is well positioned to compete in the PCB industry given its size, experience and access to its parent’s (KingBoard) network of resources. As mentioned previously, we also think FY07 net profit will not be reflective of ELEC’s earnings potential. Given its double-digit ROE and nature of business, ELEC should be worth between 1.5-2.0x NTA, i.e. US$2.78-3.70, per share. We will keep our current fair value per share of US$3.32 as it falls within this range. Although ELEC has an upside potential of 59.6%, and is currently trading at undemanding 7.3x TTM EPS, 8.6x FY07E EPS, and P/NTA of 1.1x, we will maintain our HOLD recommendation as we are still unable to find any strong share price catalyst in the next six-to-nine months. Longer-term investors who are attracted by its yield and undervaluation may add or initiate a new position, as we doubt the stock price will go down much further from current levels. We guess downside is probably at the US$1.90 level, or -8.7%, giving the stock an attractive risk/reward for the longer-term investor..

Broker House: OCBC Investment Research
Analyst: Kelly Chia

Price: $3.60
Target : $4.56
Recommendation: BUY
Upside: 26.67%

Summary:

Resilient performance. Despite government regulatory cooling measures in the steel industry through sudden tax rebate cuts in May 07, hot-rolled steel coil (HRC) producer Delong Holdings (DLNG) gave a credible showing with 1H07 sales rising 37% YoY to S$646.2m. 1H07 net profit rose 26.1% YoY to S$77m despite incurring its first year of tax expense of 15%. On a quarterly basis, 2Q07's bottomline came in 8.1% YoY lower than 2Q06 due to rising raw material costs and slightly lower ASPs as the supply of steel increased locally.

Outlook for Chinese steel industry. China's macro control policies have somewhat cooled the red hot construction and machine building industries, slowing the demand for steel consumption. Despite these measures,industry watchers anticipate a 4-5% YoY increase in steel consumption in China for FY07 and even stronger consumption in FY08.

Optimistic of prospects in 2H07. DLNG has reported that its diverse pool of customers from the booming Bohai Economic Circle continue to display strong demand for its HRC products despite the rise in supply. Management has indicated that its HRC ASPs have already stabilised in Jul 07 (just 1 month after government intervention) and is expected to maintain or even rise incrementally in 2H07 as it focuses on selling better grade HRCs. Rising raw material costs will also be mitigated when its Phase 3 technical enhancements are completed.

Waiting for the big acquisition. Management has updated that it is in deep discussion with 2 potential acquisition targets to incrementally achieve 10m ton/yr capacity by 2010. In our last report, we forecasted that DLNG will need to acquire about 2m tons/yr to achieve this target. We anticipate that DLNG will not acquire any plant with capacity larger than 3-4m tons/ yr in its maiden M&A to prevent overwhelming integration issues.

Strong outlook. As capacity reaches 3m tons/yr by year end with the plant at full utilisation and M&A to increase output, we are confident that FY07/08 will be strong years. DLNG's exposure to raw material price increases will also be mitigated when its 2 new furnaces to process pig and molten iron come online progressively by end FY07. We maintain our BUY rating and fair value of S$4.56

Strong showing in 1H07. Courage Marine reported a 52% YoY rise in net profit to US$20.1m in 1H07, on the back of a 33% rise in revenue to US$34.9m. This strong performance occurred in a period when four of Courage Marine’s 10 vessels were out of deployment for 175 days due to special/intermediate surveys in 1H07.

High Freight Rates. Courage Marine benefited from high level of dry freight rate. The Baltic Dry Index (BDI) averaged 5700 in 2Q07, more than double 2Q06’s average of 2700. Freight rates were high because of China’s strong demand for minerals and commodities. This was complemented by high level of building activities throughout Asia and Middle East, leading to demand for transportation of building materials.

Outlook. BDI is currently above 6500. Management expects present buoyant market conditions to continue and BDI to remain strong. This is due to no significant new supply of vessels in the immediate future to meet the strong demand for freight transportation. Demand for the transportation of raw materials and commodities in Asia Pacific and Middle East remains strong.

Valuation. Management has committed and fulfilled a pledge to pay 50% of net profit as dividend. Forward dividend policy is not stated explicitly but we expect the 50% payout ratio to remain, particularly when management is accumulating a cash hoard and is reluctant to pay exorbitant pricing for second-hand vessels to augment existing fleet. An interim dividend of US 0.66 cents has been proposed. We expect a total dividend per share of US 1.6 cents for FY07. Maintain BUY for a target yield of 5.1% or 12-month price target of S$0.48.

Segment margins affected by product mix. While 1H07 Manufacturing and Support Services sales came in marginally weaker at $26.9m, operating margin fell to 13% from 31% in 1H06. The sharp decline in margin was due to changes in product mix which saw Jadason producing less of its higher margined handset PCB. Management estimates handset PCB to be c20% of its drilling product mix in 1H07 vs. 70% in 1H06. There is also no evidence of improvement in the drilling product mix, which is overly skewed towards lower margined computer, car, LCD TV PCBs. Equipment and supplies sales declined 14% to $87.6m due to lower equipment sales whilst its operating profit margin improved slightly to 5% due to lower SG&A expenses and lower provision for variable incentive bonus in 2Q07. Overall group operating margin fell to 7% vs. 10% in the previous corresponding period.

Capacity expansion may be a double edged sword. Management will continue its planned expansion of 45 mechanical drilling machines by August; up to this juncture, the company has installed 30 new mechanical drilling machines of the planned 45. However, mass lamination capacity will be reduced to one additional production line from the previously four production lines planned. The key risk for Jadason is demand turn-up. Should this not materialise, factory loads will fall further with the addition of new capacity.

Downgrade to Hold. We are downgrading Jadason to a Hold and see fair value at $0.22 based on 8x FY08 PE; on par with its two year valuation band. Currently Jadason trades at 6x FY08 PE.

Broker House: CLSA
Analyst: Justin Yeoh

Price: $0.22
Target : $0.217
Recommendation: NA
Downside: 1.36%

Summary:

Printed-circuit board service provider Multi-Chem’s 1H07 sales grew a strong 45% YoY in revenue to S$63.7m, accounting for 55% of our original forecast. Distribution business continues to see strong growth, surpassing the Manufacturing division to account for 65% of 1H07 revenue. Given the lower margins in the distribution business as the company shifts, profitability has come in lower. Our revised forecast has resulted in a fair value of 21.7Scts, maintaining our 6x 08PE.

Better distribution, lower margins. Revenue came in S$5.3m in 2Q07, up 61.4% YoY. 1H07 revenue was up 45%, but gross profit was down 1% YoY. Operating profit was down 42%, largely due to higher operating costs in the Distribution segment, resulting in 1H margins of 9% VS 21% from a year ago. Overall increase in depreciation and salary were part of the reason for the increased in costs. Inventory and receivables are higher due to the change in balance of sales in the two business segments, resulting in lower cash on hand at S$7.9m, compared S$12.6m at the end of March. Effective tax rate is also higher in 1H07 at 31%, compared to 16.6%, lowering net margins to 5% instead of 15.2% in FY06 due to expansion of Distribution business in South East Asia. No interim dividend was declared.

More pressure ahead. Multi-Chem operates in the PCB drilling segment which has lower value than full scale PCB manufacturer, outlook remains though for the segment, especially for the Singapore manufacturing segment. We expect distribution to be the key business driver for Multi-Chem, even as raw material costs dampen the slower Manufacturing segment. The expansion of the distribution business also requires a larger sales force to promote products, while lower utilization of drilling machines will continue to depress manufacturing gross margins. We expect the 2nd half to do better based on seasonal trends.

Fair value of 21.7 Scts. Adjusting our forecast for the lower margins of the Distribution segment, our new 07 net profit comes in lower at S$8.7m. Maintaining our 6x 08PE suggests fair value of 21.7 Scts.

Weakness in 1Q07 continues into 2Q07. After a 54% YoY decline in 1Q07 net profit, Jadason follows with another 32% YoY decline in 2Q07. Net profit of S$5.5m in 1H07 is 43% lower than 1H06. Management attributed this poor set of results to lower equipment sales, and unfavorable product mix in its manufacturing service, which include mechanical drilling services, and mass laminate production. However, the second quarter saw a sharp fluctuation in Jadason’s utilization rates, with 100% utilisation in April and 60% in June. Management explained that a major handset PCB producer suddenly delay its orders in May. 30 new drilling machines were added in 2Q07, bringing the total number to 170 by end Jun 2007.Compounding this weak performance was an unexpected strengthening of US and Hong Kong dollar in 2Q07 against Sing dollar. This led to an unrealized forex loss of S$323k in 2Q07 against S$269k gain in 2Q06.

Outlook for 2H07 is better. Management expects the PCB industry to improve in 2H07. This prognosis is based on indicative orders from Jadason’s customers. We concur with such optimism in view of the impending launch of 3G phone services in China, latest by 4Q07. As handset need to be delivered to the distribution channels before the service launch, we expect orders for handset PCB to ramp up in 3Q07.

Orders flow should improve. Orders for PCB typically pick up in 3Q to be in time for year end consumption binge. We expect the pick up to be stronger in 3Q 2007 because the PCB industry has been in the doldrums since Dec 2006. Channel stockpiles are not excessive. However, there are lingering uncertainty as Windows Vista has not taken off strongly, and sales of new games consoles were not as strong as earlier expected.

Valuation and recommendation. We have reduced our 2007 net profit forecast from S$22.4m to S$17m (EPS: 2.4c) and 2008 from S$36.5m to S$30m. (EPS: 4.3c) Maintain BUY with a reduced 12-month price target of S$0.30, down from S$0.38, on an unchanged target of 7x FY08 earnings.

Growth in OEM/ODM segment in 2H07 will be driven by the continuing demand for ADSL2+ and HomePlug. The ADSL2+ contract with a large USA Telco will continue into 2H07 and drive ADSL modem shipment to a record high in FY07. Demand for HomePlug remains strong. Aztech also started shipment of the first 70,000 HomePlugs to a satellite service provider in USA and is also supplying HomePlugs for an IPTV service provider in Singapore.

Aztech is well-positioned to move along with the technological advances in the broadband industry with its capability and commitment in R&D. With Aztech’s network of Telcos and equipment providers in Europe in the area of ADSL, it could tap on this strength to grow its new VDSL products. In addition, Aztech is also looking into the development of new products such as higher speed 1Gbps FTTH modem.

We are now raising our FY07 revenue and net profit forecasts to S$311.9m (previously S$285.5m) and S$25.0m (S$24.1m) based on our expectation of continuing strong demand for ADSL and HomePlug into 2H07, delivery of the delayed orders of S$13.0m and the picking up of the CM segment. Our RCFderived fair value has been raised to S$0.80 (previously S$0.54). On top of a projected FY07 dividend yield of 2.8%, projected total return of Aztech will be 22.2%. Maintain BUY.

Acquisition of Wu Sheng Technology Co., Ltd. On 4 July 07, LottVision entered into a non-binding sheet with Firich Enterprises Co., Ltd for the acquisition of Wu Sheng Technology Co., Ltd. The consideration will be between S$66.3 million and S$93.9 million. This amount would be funded by the issue of shares at S$0.609 per new share. There was also a guarantee of the audited net profit after tax of Wu Sheng for the financial period 1 July 2007 to 30 June 2008 of not less than HK$30 million (approximately S$5.8 million). In the event that the net profit is less than the guaranteed amount, Firich shall pay a cash amount to Lottvision of the difference between net profit after tax and the guaranteed amount.

New fair value of S$0.76. We use a 5-yr DCF valuation method to drive a fair value of S$0.76 per share on LottVision and we upgrade to a Buy recommendation after the acquisition of Wu Sheng Technology Co., Ltd. Our 5-yr forecast of revenue is based on two potential earnings streams: (1) sales of POS terminals to authorised betting outlets (trading revenue), (2) a percent of lottery sales for each POS terminal (outsourcing revenue).

Attractive valuation, but stock remains speculative. Based on our fair value of S$0.76, the stock offers upside for investors. However, there is a substantial amount of risk as the company reports a loss for FY07 and our valuations are based on expected net profit after tax from FY08 onwards. We will monitor the financial results for FY 08 and provide an update for investors.

Risk factors in our estimates. The risk factors in our estimates are (1) loss of key management and execution risks may delay the Group’s operations, (2) deregulation of the sports lottery market has opened up the competitive landscape to foreign companies, which may reduce the Group’s market share, (3) changes in China’s regulation may affect the Group’s operations and earnings.

Record FY07 earnings. Singapore Exchange (SGX) posted record FY07 earnings of S$421.8m, more than doubling that of FY06. Excluding the one-time gains from the disposal of the SGX Centre and the write-back of the impairment allowance on the same building, net profit would have been S$311.3m, still a record high, and fairly in line with market estimates. Improvements came from all fronts. Revenue rose 41% to S$576.2m in FY07. Securities topped with revenue of S$326m, up 56%, or 57% of total revenue, buoyed by the surge in securities trading volumes and values since the start of 2007. Derivatives revenue grew 22% to S$117m. Other positives included more new and bigger listings (46 new IPOs, 70% foreign), Exchange Traded Funds (ETF) and Global Depository Receipts (GDR).

Raised base annual dividend to 12 cents. Management has raised the annual base dividend from 8 cents to 12 cents with effect from FY08. The final dividend for FY07 is a total of 30 cents (2 cents for 4Q + a variable dividend of 28 cents). This means a total payout of 36 cents in FY07 (FY06: 16.2 cents), once again exceeding its base dividend.

Positive newsflow. In the last few months, SGX has seen several positive developments, with two key deals being a 5% stake in the Bombay Stock Exchange (BSE) as well as the Tokyo Stock Exchange's 4.99% stake in SGX. In addition, it has signed several partnerships including two MOUs with the Hanoi Securities Trading Center and Ho Chih Minh City Securities Trading Center. All these have been captured in its share price in the last 1-2 months, which has moved to a recent high of S$10.90, up 91% for the year, making it the best-performing exchange stock in this region. Trading momentum looks good so far this quarter, with average daily volume of 4.5b units in Jul - another all-time high.

Based on the still strong market activities, we have raised FY08 earnings estimates from S$238.7m to S$286.8m, largely on account of optimistic estimates for both securities and derivatives in FY08. As valuations for its peers have also moved up, we are upping our valuation parameter from 25x to 30x (peer range: 25-37) FY08/09 blended earnings. Based on this, we are raising the fair value estimate for the stock from S$6.20 to S$8.80. We maintain our HOLD rating on SGX as its net yield remains good at around 3%.

Broker House: CLSA
Analyst: Zhuo Zhengjie

Price: $0.62
Target : $0.57 - $0.68
Recommendation: NA
Upside: -8.16% to 9.68%

Summary:

Qian Hu announced very strong results for 1H07, net profit was up a strong 57% on the back of steady revenue growth and improved margins. While expenses continued to rise, revenues grew at a faster rate, contributing to a higher operating margin. We have increased our FY07 forecasts, and upgraded FY08 earnings, which we think were pretty conservative. A fair value range of 11-13x FY08 PE (i.e. S$0.57-0.68) would be appropriate, given it operates in a niche segment, and is a small profitable outfit.

Strong 1H07 results. 1Q07 showed positive signs of improvement, and 2Q07 continued the upward trend. While topline growth was 22% YoY, cost management in selling and general expenses improved operating margins as operating profit was up 40% YoY. Taking into account a concessionary tax rate of 10% and minority interests, net profit actually rose 88.4% YoY for 1H07.

Revenue trends. Dragon fish sales continue to be the main driver, as the company saw strong export of the ornamental fish to new markets like China, Middle East, Russia and Australia. Accessories segment continues to grow as more effort was channelled to target overseas markets which were previously untapped. The Guangzhou factory managed to secure more orders.

Going forward. The company has plans to increase its customer base and geographical footprint by exporting to more countries via its distribution hubs in Singapore, Malaysia, Thailand and China. Besides that, it intends to increase the number of retail chain stores, particularly in China. Meanwhile, it will focus on increasing distribution points in China for its Dragon Fish and other accessories to more than 100.

Valuations. In light of a sound performance, we think an earnings upgrade is warranted. With a robust economy, we expect discretionary spending to increase, and Qian Hu, with its ornamental fish, is clearly poised to capitalise on this trend. Moreover, the signs are all positive as demand has clearly increased, and the company has benefited from cost management, and well as a concessionary tax rate. We think a fair value range for Qian Hu is 11-13x FY08 earnings, which puts it in the range of S$0.57 – S$0.68.

Stellar 1H07. Strong sales in China, Malaysia and the Middle East have boosted revenue growth of 15% YoY to S$20.8m, accounting for 42% of our FY07 estimates. Cityneon maintained gross margins firmly at 43.7%. Marketing and distribution costs grew slightly higher at 35.4% YoY due to increased marketing activities. Net profit grew 16% YoY to S$1.8m, but was down 40.6% HoH because of seasonality. 1H revenue and net profit have historically amounted to approximately 44% and 30% of full year results, with 1H07 largely in line at 42% and 33% respectively of our original full year estimates. No interim dividend was announced.

Strong 2H07 orders. Given that Cityneon’s order books are currently at S$32.2m, it is well on track to exceed our full year revenue estimates of S$49.4m. With 1H07’s effective tax rate at 8.7% VS 16.3% in 1H06 and 12.6% for FY06, the company could surprise on the upside. However, due to the seasonal nature of its business, we will maintain our conservative forecasts for now. Growth will depend on the penetrating into new events, the scale of the service and the amount of specialization that Cityneon can provide, such as customized branded booth, compared to core business of equipment rental and booth building. Outlook remains strong, but HoH growth is lower compared to FY06’s exceptional performance. The company maintains a strong net cash position of S$5.9m.

Slight upgrade. We have upgraded Cityneon’s revenue and earnings slightly by increasing our growth estimates for overseas earnings, which grew 38.5% YoY to 47.4% of 1H07’s total revenue, but there may be upside surprise given the strong order book. Maintaining out 8x 08PE for similar sized companies, our fair value arrives at 65Scts.