·We initiate coverage on Hafary Holdings(Hafary) with a BUY recommendation and a SOTP-based target price of S$0.66, implying a 36.1% upside from the current price. Strong construction demand is likely to boost future earnings. Valuation is backed by a portfolio of industrial buildings held at low cost on balance sheet. Any plans to unlock hidden value of the property portfolio may be an upside catalyst for the stock, in our view.
·Strong construction demand to boost project demand. The Housing Development Board (HDB) has been increasing its housing supply, introducing 25,000 Build-to-Order (BTO) flats in 2012 and 2013. As one of the major suppliers of tiles in Singapore, Hafary is likely to benefit from the strong housing demand. In 1HFY13, Hafary started to supply to a number of new BTO flats.
·Hidden value in industrial properties.Hafary currently owns four leasehold properties that are held at cost on balance sheet. Using valuations based on recent resale transactions, we derived a fair value of S$60.2m for Hafary’s four leasehold properties. The derived fair value is S$13.8m (S$0.06/share) higher than the book value in its balance sheet. A near-term upside catalyst may emerge if Hafary enters into a sales-and-leaseback agreement or a direct sale that could unlock the hidden value of its industrial properties.
·Another bumper dividend? Hafary recognised a one-off gain of S$23.8m (S$0.11/share) from the sale of its development property. Consequently, it announced an interim dividend of 2.5 S cents for FY13. Given the surge in revenue and adjusted net profit for 1HFY13, we believe there is still room for more dividends. For FY12, Hafary announced a dividend of 2.5 S cents. With FY13 capex investment forecasted to moderate, the company is able to return excess cash to reward shareholders, in our view.
·Foreign investments - an additional driver of revenue and earnings. Hafary has a 45% and 49% interest in Hunan Cappuccino Construction Materials (HCCM), a tile manufacturing facility in China, and Viet Ceramics International Joint Stock Company (VCI), a tile distributor in Vietnam, respectively. We see these two overseas investments as positive moves by the company to diversify their revenue stream out of Singapore. Vertical integration through the investment in HCCM enables Hafary to secure its tiles supply and possibly improve margins, while investment in VCI allows Hafary to tap into one of the fastest-growing economies in the world.
·Key risks include a) Reliance on Singaporemarket, b) supply dependency on foreign manufacturers, and c) developers sourcing directly from overseas tiles suppliers.
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