Excerpt from UOB Kay Hian report

Analyst: Nicholas Leow

NOT RATED | Price: S$0.345 | Mkt Cap: S$81.3m 

Blast From The Past

Frank.Wee.SamL-R: Stamford Tyres financial controller Frank Ng | President Wee Kok Wah | Non-executive chairman Sam Chong Keen. NextInsight file photoAfter years of flying under the radar, STC is poised to reap the benefits of a lengthy exercise to streamline operations. Earnings momentum is likely to be maintained in FY18 as loss-making territories start to gain more traction and as top-line growth resumes based on the 2HFY17 trend.

STC presents a nice margin of safety as the RNAV of its properties is expected to be worth S$80m-90m. Investors can look forward to being rewarded in tandem with the success of the company.


VALUATION

·        Attractive valuation as peers’ trade at 10.9x FY18F PE. Should Stamford Tyres (STC) be able to sustain its earnings momentum from 2HFY17 into FY18, net profit could likely range from S$10m-11m.

From a P/B perspective, STC is trading at 0.66x FY17F P/B. Should STC revalue their properties, it would likely trade at a much bigger discount to the current book value.

INVESTMENT HIGHLIGHTS

·        Earnings momentum to continue into FY18. In 2HFY17, STC’s net profit came in at S$5.1m. Given the absence of any seasonal effects and based on a back-of-the-envelope calculation, STC’s FY18 net profit could come in at S$10m-11m.

Over the last few years, STC had undergone many operational changes such as natural forex hedging in locations where it is expensive or impractical to hedge forex risk and being more inventory-light by rationalising excess inventory over the last few years.

STC’s management has also carried out margin enhancement initiatives from FY15-17. Even though sales declined from S$292.5m in FY15 to S$235.8m in FY17, gross margin improved dramatically from 22.3% in FY15 to 27.4% in FY17 as STC pursed more value-added activities. FY18 could be the year in which STC returns to revenue growth.

Compelling valuations vs peers 
NicolasLeow"With peers such as Apollo Tyres and YHI International trading at an average FY18F PE ratio of 10.9x, a fair value of S$0.46-0. 50 for STC is justified on the basis that STC records a net profit of S$10-11m in FY18. Furthermore, STC is trading at only 0.66x FY17F P/B and should the properties be revalued, the discount to book would be much wider."

-- Nicholas Leow (photo)
Analyst, UOB KH

·        Properties undervalued on balance sheet. STC has quite a number of properties owned by the group especially in main markets where the group operates (Singapore, Malaysia, Thailand, Indonesia and South Africa).

STC does not revalue the properties on its balance sheet. Properties on its balance sheet could be worth as much as S$80m-90m vs its property book value of about S$50m.

·        Minority shareholder-friendly management. STC has never failed to pay out dividends to shareholders every year with the exception of FY09. The dividends paid have been in relation to the company’s performance for the year.

Should STC record a net profit of between S$10m-11m, STC could potentially pay out a generous dividend of between 1.5-2.0 S cents /share which translates to a healthy dividend yield of between 4.3-5.8%.