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.

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.

SFI’s Q3 net climbs 26.7% to $5.5m

Higher turnover in S’pore offsets weakness in overseas markets

SINGAPORE Food Industries (SFI) said yesterday its third-quarter net profit climbed 26.7 per cent to $5.5 million – from $4.3 million a year earlier – as food distribution and catering sales improved.

Earnings per share rose to 1.1 cents, from 0.9 cent a year earlier.

Turnover for the three months ended Sept 30, 2007 rose 13.4 per cent to $162 million, from $142.9 million previously.

Revenue was boosted by higher sales in Singapore that offset relative weakness in overseas markets.

Turnover from Singapore rose 23.7 per cent to $66.8 million on higher sales across all Singapore businesses. As a result, profit before tax from Singapore operations increased a substantial 45.5 per cent to $8.2 million.

Turnover from overseas operations also grew, by 7 per cent to $95.2 million. But an $800,000 overall loss was incurred because of losses at subsidiaries Cresset and Shanghai STFI.

‘The improvement in performance in the Singapore operations in the third quarter has been broad-based,’ said SFI chief executive Roger Yeo.

‘This improvement has helped offset the relative weakness in overseas operations, which were affected by significant raw material cost increases in the UK. We will mitigate these higher raw material costs through price increases.’

For the nine months to Sept 30, 2007, SFI’s net profit rose 6.4 per cent to $19.6 million on a 12.1 per cent increase in turnover to $493.4 million.

The company declared an interim dividend of 1.8 cents per share, which will be paid on Jan 22 next year.

Its shares closed 1.5 cents higher at 81.5 cents yesterday. The stock has fallen some 11.9 per cent since the start of the year.

SFI receives UK trade award

MAINBOARD-LISTED Singapore Food Industries (SFI) aims to expand in the UK before eventually setting up in Europe.

SFI’s United Kingdom/ European operations accounted for $199.8 million or 60.3 per cent of the group’s turnover of $331.4 million in the first half of 2007.

‘We see our position in the United Kingdom as being increasingly attractive,’ said SFI chief executive Roger Yeo.

‘We were very small. But through acquisition and organic growth, we’ve become larger. Once we get to a reasonable size within the UK itself, Europe is not a bridge too far.’

SFI’s core areas of business are food distribution, preparation, manufacturing and processing; and abattoir and hog auction services.

Its Singapore businesses employ just over 1,200 people and its UK operation has more than 1,400 employees at three wholly owned subsidiaries – Daniels Chilled Foods, International Cuisine and Farmhouse Fare.

The UK’s chilled convenience food sector is a £12 billion (S$35.8 billion) market – a key factor behind SFI’s choice of the UK as the springboard for its global growth. This promising market was also an influencing factor when SFI chose the UK as a base for international growth 16 years ago.

SFI also has operations in other markets such as China, Australia and Ireland. But Mr Yeo said that plans for venturing into European markets are still in the gestation stage.

SFI will receive the 2007 UK Trade & Investment International Business Award in recognition of its significant strategic and long-term investment in the UK at the British Chamber of Commerce’s Annual Awards Gala Dinner today.

‘In recent years, Singapore companies have been getting more adventurous and looking beyond the region,’ said British High Commissioner to Singapore, Paul Madden. Singapore, which is the UK’s biggest trading partner in South-east Asia, invested about $7.1 billion in the UK in 2005.

‘The SFI success story, with such remarkable growth in a relatively short time span, exemplifies the business growth opportunities that Singapore companies find in the UK,’ said Mr Madden. ‘Such opportunities are not restricted to large companies only but extended to small and medium enterprises as well.’

The UK provides good opportunities to grow business, he said, pointing out that SFI chose it because of a common language, similar legal and business structures and the UK’s reputation as an open economy with pro-business government policies and regulations.

Financial Data

All the data are extracted from the results,

Notes :

• All figures in S$,000 unless otherwise stated
• FY is end-Dec

Result Highlights

• Turnover
• Turnover : +$11.7 million (+7.9%)
• Overseas : +17.4% ; Singapore : -5.9%

• Singapore
  ▪ Food Distribution : -$3.6M Q-on-Q. Continued to be impacted by supply and stock issues. General suspension of chicken imports from China also had a negative impact.
  ▪ Food Catering : -$1.2M (-5.5%). Due to lower exports (S$0.5M) of “meals-ready-toeat” (“MRE”), compared with S$2.4M exported in 2Q 2006. Food catering sales to its key customer in Singapore were higher during the quarter.
  ▪ Abattoir and Hog Auction revenues were higher by $1.3M (+33.4%) due to higher number of pigs supplied and a $3 per pig slaughter fee increase from 1 April 2007.

• Overseas
• Overseas subsidiaries reported combined sales increase of $15.2M (+17.4).
  ▪ Daniels grew $6.9M (+14.0%), helped in part by a higher Sterling Pound/ Singapore dollar exchange rate. Daniels’ sales in Sterling Pound grew 10.0% for the quarter, with prepared fruit and juice/drinks registering growth rats of 14.5% and 31.8% respectively. Soup however, declined 5.8% due to a very warm April which effectively ended winter sales earlier by a month. The warmer weather prompted retailers to switch to summer merchandising early and negatively impacted on soup sales.
  ▪ International Cuisine Limited (“ICL”) sales grew $4.5M (+18.1%). In Sterling Pound terms, the increase was 13.9%. The increase in sales was due to promotions on certain product lines by one of ICL’s key customers and successful launches of two other product ranges for another key customer. Branded NCG ready meals were also launched towards the end of the quarter.
  ▪ Cresset Limited (“Cresset”) sales grew $0.2M (+3.9%) – Growth in Euro was 1.1%. While CRM sales increased $1.3M (+47.4%), sales of ambient meals were $1.1M lower.
  ▪ Farmhouse Fare acquired at end October last year, contributed $4.9M of sales in chilled desserts.
  ▪ Revenues from Australian subsidiaries were higher by $1.0M (+15.7%).
  ▪ Shanghai STFI (“SSTFI”) turnover declined $0.6M (-29.1%) due to the ban of chicken exports to Singapore. This follows a general suspension of imports of chicken products from China in February this year. Sales in the domestic market also declined during the quarter.

• PBT
• PBT for the quarter decreased $1.0M (-10.3%).

• Singapore
• PBT from Singapore was lower by $1.5M (-20.8%) as a result of poor performance from Food distribution. Food Distribution profit was $2.3M lower due to lower sales and lower margins. Profit for Food Catering was lower due to lower exports of MRE packages when compared to the same quarter last year. Abattoir and Hog Auctions reported higher profits due to higher number of pigs supplied and the $3 per pig slaughter fee increase from 1 April 2007.

• Overseas
• PBT from overseas grew $0.5M (+17.4%).
  Daniels’s profit was $0.9M (-39.0%) lower despite a 14.0% increase in sales. Higher sales (and higher profits) from prepared fruits and juice/drinks were not adequate to offset the reduced profit from lower soup sales which had the highest profit margins amongst Daniels’ core product categories.
• ICL’s profit increased $0.4M on higher sales.
• Farmhouse Fare contributed $0.2M in profits, which included a provisional charge of $0.5M for amortisation of intangibles relating to its acquisition.
• Cresset registered a loss of $2.6M for 2Q 2007, compared with a loss $1.1M for 2Q 2006. The results included $0.9M restructuring costs of the ambient business which is being phased down. Results at the operating level were also poorer as labour reductions could not be brought down fast enough in line with the lower activity levels at the ambient operations.
• Profits from Australian subsidiaries were higher by $3.3M. 2Q 2007 results included a $4.4M restructuring grant received as compensation from the Great Barrier Reef Marine Park (“GBRMP”) Authority. A $1.1M impairment loss on fishing license was recognised, as well as $0.1M gain for disposal of another fishing vessel.
• Loss from SSTFI was $1.1M, compared with a small loss for 2Q 2006. The higher losses were attributable to lower sales, and a $0.5M stock provision made during the quarter.

Forward Statements

• Singapore Operations
• The supply situation in Food Distribution has been resolved and supplies have reverted to normal.
• Food Catering is expected to perform better in the second half of the year as the recent renewal of the UAE contract will increase sales.
• Abattoir and Auction revenues will be assisted by the $3 per pig slaughter fee increase for the full 2H2007. Barring a serious outbreak of pig diseases, the pig supply numbers is expected to stabilise at 1H 2007 numbers, which is an improvement over 2H 2006.

• Overseas Operations
• With the exception of Cresset, the UK/Europe businesses are expected to perform well in the second half year. Cresset has been restructured. The objective is to have Cresset achieve break-even in cash terms by 4Q 2007. Production for a key ambient customer (with low margins) ceased at the end of 2Q 2007. Staff reductions have continued throughout 2Q 2007. A number of initiatives are being taken that should deliver overhead cost savings to improve the situation in Cresset.
• The key performance driver will be our ability to grow our CRM volumes ahead of a fast-growing segment. SSTFI performance for 2H 2007 is expected to continue to be weak. Price increases have been effected in the domestic market at the end of 2Q2007, to help mitigate higher raw material costs and consolidation of manufacturing activities at one site should reduce overheads considerably.
• The import ban of chicken products from the Peoples’ Republic of China is not expected to be lifted soon.
• In Australia, the receipt of the GBRMPA grant has paved the way for exit from commercial fishing operations. We continue to review business options regarding the seafood processing business.

• Overall Outlook for FY 2007
• Overall, we expect better earnings for FY 2007.

Source : SGX