From DMG:
Sound Global: Strong growth ahead (BUY, S$0.84, TP S$1.05)
Selena Leong (6232 3898,
selena.leong@dmgaps.com.sg
)
Terence Wong, CFA (6232 3896,
terence.wong@dmgaps.com.sg
)
Sound Globalâs (SG) 3Q10 earnings slumped 51.5% YoY, which was in line with our estimates.
This was attributable to higher effective tax rates, IPO expenses and FX losses. While we remain confident of order booksâ sustainability, we trimmed earnings downwards (-7.3% in FY10 and - 4.6% in FY11) to factor in the higher effective tax rates and expenses.
Maintain BUY as its cash will be invested into BOT projects, providing recurring steams of revenue. Our revised TP is S$1.05, based on 14x FY11 earnings â at least a 40% discount to its China peers.
3Q10 earnings within expectations. SGâs earnings came in at RMB60.6m for the quarter, down 51.5% YoY, despite a 8.8% YoY growth in revenue. This was attributable to higher effective tax rates, IPO expenses, employee stock options expenses and FX losses. 3Q10 revenue hit RMB570.4m, boosted by maiden contribution from the Saudi Arabia project, as well as higher contributions from the Manufacturing (higher sales from customised equipment), Turnkey Services and Operation and Maintenance segments.
Strong balance sheet.
SG is in a net cash position of RMB0.61 per share (~14% of share price). It has recently raised RMB885m from the placement of 6% USD convertible bond due 2015 and secured a loan of US$34m from International Finance Corporation (IFC). An MOU was signed for an additional US$36m of credit from IFC and SG has also secured a US$600m credit line from China Merchant Bank. This puts to rest fears that SG may not be able to obtain sufficient funding for its wastewater treatment EPC projectsâ working capital needs or its investments into the more capital intensive BOT projects, amidst the credit tightening situation in China.
Earnings revised downwards, new TP of S$1.05. While we expect projects flow to remain strong (evidenced by the recent contract win of a 60,000 tons/day BOT project in Hongze County, in
Jiangsu province), we have adjusted our FY10 and FY11 earnings downwards by 7.3% and 4.6% respectively, to factor in a higher effective tax rate and higher expenses. Applying a P/E of 14x to
FY11 earnings, we derive a new TP of S$1.05 (previously S$0.93).
