DBCVickers Report - 19 Nov 2007

HupSteel Ltd Riding on firm demand

Story: Following the release of HupSteel’s 1Q08 results last week, we caught up with the management at a luncheon briefing last Friday for further updates. The management remains positive on the group’s business outlook.

Point: Driven by the buoyant marine, oil and gas, and construction sectors, revenue for 1Q08 was up 30% y-o-y on the back of sustained demand for steel. However, gross profit margin shrank 2.6ppt y-o-y to 22.8% due to a higher proportion of sales in the lower margin structural steel products. Bottomline declined 5.5% y-o-y to S$7.4m in 1Q08. However if we exclude the one-off special dividend received from an early redemption of a bond of S$0.7m after-tax in 1Q07, y-o-y net profit growth would be 4.4%.

Relevance: We have lowered our FY08 earnings estimate by 12.8% to account for higher expected operating costs and greater proportion of sales in lower margin structural steel products. We have therefore lowered our fair value to S$0.51, which is based on 10x FY08 earnings, and after accounting for the 1-for-4 rights issue. Maintain BUY.

Olam International Buys into African plantation assets with Wilmar

Story: Olam and Wilmar have jointly announced the formation of a 50:50 joint venture named Nauvu Investments, which will invest in integrated palm oil, natural rubber and sugar assets in Africa, including upstream plantations, midstream processing and downstream merchandising and distribution operations.

Point: We have raised Olam’s FY09 earnings by c. 10% to reflect the contribution from this JV and at the same time, assume that the Group will raise new equity (10% dilution) by end FY08 to fund future acquisitions, given that the Group’s adjusted net debt-to-equity now stands at well over 1.2x.

Relevance: We maintain our BUY recommendation, leaving our target price of S$3.80 intact, which is based on 30x FY09 earnings. We continue to like Olam for its strong earnings growth prospects, driven by both organic expansion and via acquisitions.

Boustead Singapore Engineering the world of the future

Story: A set of stunning interim results last week reaffirms our view that Boustead is poised for prime time as the company, with its many areas of expertise relating to infrastructure building, is well placed to capitalize on the strong infrastructure demand from both developed and developing countries.

Point: Further to a 5-year record of continued growth, we believe Boustead is on its way to set new heights as a strong and growing pipeline of new projects has boosted its orderbook to an all time high of S$490m. Against a backdrop of sustainable high oil prices and the construction upturn in Singapore, the Energy-related and Industrial Real Estate Solutions should remain top performers. Meanwhile, Boustead with a strong cash hoard exceeding S$100m, is all ready to take advantage of good investment opportunities to enhance shareholders’ return.

Relevance: We have resumed coverage on Boustead with a fair value of S$2.74, based on sum-of-the-part valuation. This would translate to 15xFY08 PER and 13xFY09 PER and offers 21% potential upside. Recommend Buy.