DMG: 5 companies expected to achieve record earnings for FY11

Excerpts from DMG report...

DMG highlights 5 companies expected to achieve record earnings for FY11.

Analyst: Goh Han Peng

World Precision Machinery produces stamping machines that mass-produce parts for various industries such as automobile and white goods. File photo by Andrew Vanburen.

CFO of World Precision, Samuel Ng (right), speaking with investors after a recent presentation at CIMB. NextInsight file photo.

With the earnings season in full swing over the next couple of weeks, we highlight a number of stocks that are likely to deliver positive earnings surprises.

Either they are not well covered, or not covered at all by the sell-side. This gives scope for price discovery as the companies continue to deliver on earnings.

Five out of the six companies highlighted will deliver record earnings for FY11, the best ever in their listing history.

Fundamentally, these companies are also attractive given their sound business models and valuation grounds. Share price re-rating catalysts could come in several forms: 1) earnings delivery; 2) higher dividend payouts; 3) spinoffs, restructuring or privatizations.

William Crothers, CEO of LMA. NextInsight file photo

We highlight Orchard Parade, the listed hospitality arm of Far East Organisation, Hiap Hoe, a niche developer specialising in prime residential projects with a substantial backlog of pre-sales to be recognized, LMA International, a global leader in the laryngeal mask range of medical devices and Hotung Investments, a venture cap company trading at 0.5x P/BV with > 10% prospective yield.

In the S-chip arena, we like World Precision Machinery (WPM), a leading stamping machinery manufacturer and Foreland Fabrictech, a vertically integrated manufacturer of functional fabrics trading at 2x P/E.

FY11 will be a record year for World Precision Machinery with projected net profit of RMB 180m (+ 44% y/y), surpassing its previous peak of RMB 144m in FY07.

WPM's growth prospects are driven by rising industrialisation and the shift towards high value-added manufacturing in China.

Among S-Chips, WPM (48 cents) is one that has a consistent track record of paying dividends. Based on a 35% payout ratio, the stock yields 6% and trades at forward P/E of 4.4x.

For 9M11, Foreland reported net profit of RMB107m, a five-fold increase in earnings, putting it on track to achieve record profit for the year and surpass the previous earnings peak of RMB 107m in FY08. To date, the group has achieved 6 quarters of sequential earnings growth.

Foreland’s next phase of growth will be driven bv capacity expansion at its new production facility at Andong Industrial Area in Jinjiang, Fujian province.

The stock (10 cents) trades at a bargain valuation of 2.4x FY11 P/E, reflecting the negative sentiments towards S-chips. However, unlike other S-chips, the stock has a dividend paying history.

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