Brokers' Take Published March 28, 2008

Olam International

STRUCTURAL de-leverage needed: We are downgrading Olam to 'sell' from 'neutral' due to: 1) reduction in our fair value estimate to S$1.60, 2) high net gearing of 4.6 times implying an immediate need for equity, 3) reduction in growth associated with de-leveraging, and 4) aggressive accounting policy. We are one of the first to advocate a 'sell' on the stock.

Gearing at risky level: Olam has become dependent on leverage for growth which, in our view, is not sustainable given the high 460 per cent net gearing and low 1.7 times interest coverage. We think a structural de-leverage is imminent since we believe bankers would likely impose stricter covenants as debt usage accelerates.

Lower leverage = slower growth = lower multiples: We are expecting earnings growth in FY09-FY10 to fall short of management guidance, in the absence of an equity placement. Our FY09 estimate is 10 per cent below consensus. Even with an equity injection, the sustainable ROE would likely fall to the around 20 per cent achieved in 2005-2007, as de-leveraging takes place.

The prospect of de-leveraging and slower growth would lead to a de-rating of valuation multiples.

Fair value of S$1.60; switch to Noble Group: The stock is trading at 5.3 times FY08 NAV estimate. We think 5.3 times book value is a high price to pay for a business that generates 20 per cent ROE. We value the company at 3.6 times FY08 NAV estimate or S$1.60 using the Gordon growth model. At the current level, we recommend a switch to Noble Group, which is trading at 2.1 times NAV and 13 times PE.SELL

Jurong Technologies
March 27 close: S$0.315
Nomura Research, March 26

OUR VIEW: Margins at Jurong Technologies' (JTL) handset ODM business look under pressure, given increased competition from global handset OEMs and Chinese tier-1 handset players. With JTL facing a funding crunch given its high gearing, and margins unlikely to recover in the short term, our numbers depend on strong execution by management.

Anchor themes: As flagged in 'Handsets: Sleep mode' (March 21), we believe that while developed markets will bear the brunt of the consumption slowdown, handset OEMs will re-direct resources to 'relatively safer' emerging markets, especially the sub-US$50 market, increasing the competition for JTL's ODM business.

Sales from the accessories business rose to 46 per cent of the total in FY07, from 15 per cent in FY06, increasing working capital needs. With net debt to equity at 100 per cent, JTL faces a catch-22 situation in its attempts to clean its balance sheet.

Fair value at S$0.27 per share; 'reduce': We have forecast sales growth will slow as the company changes its product mix to increase ODM business and reduce its exposure to wireless accessories. We now expect sales to grow 7.8 per cent year-on-year in FY08, 4 per cent year-on-year in FY09, and 2.3 per cent year-on-year in FY10.

We expect Ebit margin to fall 0.5 percentage point year-on-year to 3.4 per cent in FY08, to reflect: 1) pressure from core EMS business, ie, lower utilisations in PCBA and rising sales of lower-margin wireless accessories; 2) higher operating expenses given the increase in R&D as JTL positions itself as an IP design house; and 3) higher interest costs as loans increase to fund higher working capital needs. We have assumed the Ebit margin will return to the 4-5 per cent range (closer to industry Ebit margins) after FY08, contingent on execution by management.REDUCE

Venture Corporation
March 27 close: S$11.20
DBS Group Research, March 27

SLOWER-THAN-EXPECTED Q1: Our recent update indicated that apart from a seasonally softer March quarter, customers have continued to tighten and rebalance supply chains for printing and imaging as well as some retail store solutions (RSS) products. This, coupled with further weakening of the US dollar against the Sing-dollar, down 4 per cent year-to-date, would result in sequentially lower Q1 sales.

It is also inevitable that Venture's bottomline would be impacted by bigger marked-to-market losses for CDOs, as the market spread has continued to widen from last quarter.

On a more positive note, margins at the operating level could hold steady as new products are driving strong margins in the RSS and communication/networking space, which help to mitigate printing and data storage margin erosions. Venture's design initiatives to lower material content and manufacturing costs are also gaining positive tractions with several key customers, but actual benefits will only be visible over the next few quarters.

FY08 forecast cut by 14 per cent: We now expect Q1 net profit of S$67 million (-5 per cent year-on-year, -10 per cent quarter-on-quarter), on revenue of S$937 million (-3 per cent year-on-year and quarter-on-quarter). We have cut FY08 earnings by 14 per cent to account for weaker revenue and lower non-operating gains, given potentially bigger CDO losses. Consequent to this earnings revision, our target price is adjusted to S$12.81, still pegged to 12 times FY08 earnings.
Downgrade to 'hold': Venture has done well, outperforming the broader market with a 16 per cent gain versus the Straits Times Index's 4 per cent decline in the past one month. Although the stock is undemanding at 10.7 times FY08 PE, upside may be limited in the near term, given a lack of positive price catalyst and continued pressure from forex and credit risks.HOLD

- Compiled by UMA SHANKARI

Disclaimer: All analyses, recommendations and other information herein are published for general information. Readers should not rely solely on the information published and should seek independent financial advice prior to making any investment decision. The publisher accepts no liability for any loss whatsoever arising from any use of the information published herein. Brokers who wish to send in their reports can email us at btnews@sph.com.sg