Excerpts from UOB Kay Hian's report

350_8ez_bullWE EXPECT companies in net cash positions to outperform in a rising rate environment. Key picks include OSIM, CSE Global, Silverlake, Lantrovision and Isoteam. We believe investors will be scrambling to move funds out of highly indebted companies to cash-rich companies in a rising interest rate environment. These companies are also more likely to maintain a stable dividend payment without the risk of higher interest payment. We present a few companies under our coverage that are in net cash positions and can provide decent dividend yields, backed by earnings growth. Key picks include OSIM, CSE Global, Silverlake, Lantrovision and Isoteam.

a) OSIM (BUY/Target: S$2.87). The share price has weakened by 31.6% from the 52-week high on weaker 3Q14 earnings and a potential dilution from the convertible bonds issue. OSIM reported 3Q14 revenue of S$158.2m (+3.4% yoy) despite a full consolidation in TWG’s financials as compared to none in 3Q13, when OSIM had not yet acquired TWG.

Management attributed the slower top-line sales growth to the overall weaker environment and a loss of sales to Brookstone after OSIM ceased to be a shareholder. Operating EBITDA for 3Q14 dipped 12% yoy to S$27m as OSIM grappled with higher start-up costs and employee costs from the TWG business segment. However, we see value emerging after the share price slump as the stock currently trades at a forward FY15F PE of 14.0x with net cash representing 15.1% of its market cap.

LimBoonKhengLim Boon Kheng, CEO of CSE Global. NextInsight file photo.b) CSE Global (BUY/Target: S$0.88). 9M14 net profit jumped 4.7% yoy to S$25.0m driven by higher revenue of S$313.6m (+9.2% yoy) as the company executed projects in the US and Australia. 

Order intake for 9M14 rose 6.3% to S$288.1m, mainly from offshore instrumentation and electrical works in the Gulf of Mexico. However, management did caution that the operating environment remains challenging as weaker oil and commodity prices could soften demand. The stock currently trades at a forward FY15F PE of 8.3x with net cash representing 5.0% of its market cap.
c) Silverlake Axis (BUY/Target: S$1.70). Backed by strong fundamentals and a healthy balance sheet, the group is well poised to continue its strong growth given the increasing earnings visibility from near-term orderbooks.

Rising and recurring Maintenance and Enhancement (M&E) services revenue further enhances earnings quality while positive trends in the financial industry will drive Silverlake Axis’ long-term growth outlook. We project a 3-year earnings CAGR of 21.3% and dividend payout of 89%, yielding 3.6% in FY15. The stock currently trades at a forward FY15F PE of 24.8x with net cash representing 5.0% of its market cap.
d) Lantrovision (BUY/Target: S$0.655). Lantrovision is a leading one-stop cable solution provider principally engaged in the installation of structured cabling systems used to transmit computer and telecommunication signals.

Primarily, serving the IT and finance sectors, 70-80% of sales are from repeat blue-chip clienteles such as American Express, DBS and Microsoft. Lantrovision has traditionally generated very strong free cashflows due to the business’ low capex requirement which allowed it to accumulate a strong net cash position of S$72m (about 49% of market cap). 

ISO_CEOGM4.14Anthony Koh (left), CEO of ISO Team, and the GM, Richard Chan, speaking with an analyst. NextInsight file photoe) ISOTeam (BUY/Target: S$0.62). Backed by local legislation requiring buildings in Singapore to be repainted every five years, ISO’s R&R segment (70% of FY14 revenue) is highly defensive and recurring in nature. In addition to a positive industry outlook, ISOTeam is poised to grow inorganically with its recent acquisitions of four local companies that will allow it to enjoy greater cost efficiency and establish a presence in the current relatively untapped private commercial sector. 

We continue to like ISOTeam for its strong balance sheet (net cash), defensive business nature, and strong earnings growth (FY14-FY17F projected earnings CAGR of 23.6%) as it looks to ride on the growing Singapore market.  

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