SFI – OCBC

Singapore sparkled, but overseas lost its sheen

Singapore lifted its operation. After several quarters of disappointment from its Abattoir & Hog operations in 2006, Singapore Food Industries (SFI) has managed to maintain the momentum seen in the last three quarters with its Abattoir & Hog operation bringing in profits of S$1.8m in 3Q07. At the net level, SFI saw a 27% YoY increase in earnings to S$5.5m, giving 9-mth earnings of S$19.6m (+6% YoY). While several units within its overseas operations disappointed with losses, this was compensated by the good showing from its Singapore operations, which bucked the trend to post the best quarter since early 2006 with pre-tax earnings of S$8.2m, up 46% YoY. This came from better contribution from Food Catering as it exports “meals-ready-to-eat” to the Middle East as well as from higher consumption and sale prices. Its Abattoir & Hog operation benefited from higher number of pigs supplied and increase in slaughter fee. However, overseas operations disappointed with combined losses of S$0.8m. This was due to higher raw material costs, lower sales and other charges. Management had declared an interim dividend of 1.8 cents (tax-exempt) versus 1.76 cents net declared in 2006. This will be payable on 22 Jan 2008.

Singapore operations are likely to improve in 4Q. Moving forward, management has indicated that it expects improvement in the final quarter of the year. This will come from all three main divisions in Singapore; Food Distribution (due to the re-instatement of a key supply agency for poultry and pork), Food Catering (higher prices and consumption), and Abattoir & Hog (continue to benefit from higher slaughter fee). For its overseas operations, management is aiming for cost-cutting measures and other restructuring to result in a better final quarter.

Yield is good at current price. While we are disappointed by the performance of its overseas operations, we are partly heartened by the pick-up in its previously lacklustre Singapore operation. Overall, we have fine-tuned our FY07 earnings estimate, lowering earnings slightly from S$32.8m to S$32.3m. However, we are cutting FY08 earnings from S$35.0m to S$32.5m to reflect the weakness in its overseas operations. Following these adjustments, we are dropping our fair value estimate from 99 cents to 95 cents to reflect the lower FY07/FY08 blended earnings but still based on the same 15x earnings. At yesterday’s closing price of 81.5 cents and with good estimated yield of 6.5%, we maintain our BUY rating on SFI.

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