Selangor Dredging - BUY - 21 Aug 2008

Selangor Dredging - 1Q09 below expectations (Results Note)



Price: RM0.665

Target Price: RM1.84

Recommendation: BUY



· 1Q09 net profit of RM7.0m was below expectations being only 12.5% of our net profit forecast of RM55.9m largely because of decrease in contribution from Park Seven which was completed in 4Q08 and full utilization of unabsorbed tax losses which resulted in 1Q09 tax rate being 32% including provision. Nevertheless, EBITDA margin was sustained high at 23.8%. We believe initial marketing cost for JIA in Singapore could have bumped up operating cost in 1Q09.

· QoQ, 1Q09 net profit rose by 5.8%, on the back of higher profit recognition and higher profit contributions fro hotel of RM247,000 as opposed to operating loss of RM264,000 in 4Q08.

· YoY, 1Q09 net profit was 18.9% lower on 4.3% lower revenue and 65% higher finance cost. In addition, tax rate was only 11% on revision deferred taxes and utilisation of tax credits.

· Net gearing at 0.6x on higher total borrowings of RM449.9m and cash balance of RM142m. Cashflow remains strong with free cashflow for 1Q08 of RM25m which provides comfort that the company remains well funded to complete its projects.

· Continuously building land bank. Recent end-block purchase of Balestier Complex with a total land area of 22,281 sf in July at SGD1,929 psf was attractive given its 3x plot ratio and prominent location. Given the recent decline in equity market and high inflation, many developers have put off increasing its land bank resulting in some softening of prices. Selangor Dredging sees this as an opportunity and they believe they can make a difference with unique projects as depicted by Jia at Wilkies Road which has attracted more than 40% take up rate at SGD1,650 psf.

· Maintain BUY with target price of RM1.84 based on sum of parts RNAV. Company continues to forge ahead with class leading projects that have proven to be well received by its target market at benchmark pricing. This has enabled Selangor Dredging to price in cost increases.