SFI – OCBC

Good yield play

Stronger 4Q results. Singapore Food Industries (SFI) posted FY07 earnings of S$31.4m, slightly below our forecast of S$32.3m. The strong 4Q accounted for 38% of total earnings. Revenue grew 12% to S$714.9m, a record high. However, its performance would have been stronger in 4Q if not for a S$2.6m one-off non-trading charge in Singapore. In Singapore, revenue for Food Distribution rose 9% to S$138m, while Food Catering grew 6.8% due to higher consumption and price adjustment in April 2007. Abattoir & Hog Auction also enjoyed a strong 26% rise in revenue to S$21.3m, reflecting YoY improvement in pig supply. Overall, most divisions posted gains in Singapore. In Europe, most units improved, but Cresset and Farmhouse Fare sustained losses. Cresset posted losses of S$7.3m in FY07 versus overall UK/Europe PBT of S$22m.

Food Catering contract up for renewal. The Singapore catering contract is up for renewal by end 1Q 2008. This is a key development as it will impact earnings. Pending more details later, we are assuming that SFI is awarded the contract in our FY08 and FY09 estimates. Its Abattoir & Hog operation should be able to maintain at current operational level, assuming no surprises from the pig farm in Bulan. Its overseas operations should continue to attract the bulk of group capex. While Cresset has yet to turn around, there is a good likelihood of reduced losses following management’s outline to drive sales as costs have been under control. However, higher raw material costs will continue to cap margin. We are expecting gross margin to drop from 26.4% in FY07 to 26.1% in FY08.

Downgrade to HOLD; yield still attractive. Management has declared a final dividend of 3.2 cents (tax-exempt), bringing full year DPS to 5 cents, or an attractive net yield of 6.5%. Final dividend will be paid on 12 Jun 2008. As material costs remain high, we have pared our FY08 earnings from S$32.5m to S$31.7m. We are also rolling our valuation into FY08 and FY09, using a reduced 13x valuation (down from 15x previously to account for recent reduced market valuation), deriving a fair value estimate of 82 cents which still gives a good FY08 estimated net dividend yield of 5.8%. We are also downgrading the stock to HOLD as we do not expect any near term price catalysts until the 2H of 2008.

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