Hoe Leong Corp

OCBC on 17 May 2012

Hoe Leong Corp (HOE) reported 1Q12 revenue and gross profit of S$20.6m (+32% YoY) and S$5.3m (+23% YoY) respectively, and these were generally in line with our estimates. However, a steep and unexpected loss of S$3.3m from share of results from associates and JVs (Semua: S$4.2m losses, Aries: S$0.9m profit) led to an overall 1Q net loss of S$0.9m (1Q11: S$1.7m net profit). While we are fairly comfortable about HOE’s core business, we remain cautious on its Semua stake. There is also a possibility that Semua’s financials could be consolidated in HOE. Given the lack of clarity, we lowered our fair value to S$0.20, based on 0.7x P/B. Maintain HOLD.

1Q results dragged down by associates
Hoe Leong Corp (HOE) reported 1Q12 revenue and gross profit of S$20.6m (+32% YoY) and S$5.3m (+23% YoY) respectively, and these were generally in line with our estimates. However, a steep and unexpected loss of S$3.3m from share of results from associates and JVs (Semua: S$4.2m losses, Aries: S$0.9m profit) led to an overall 1Q net loss of S$0.9m (1Q11: S$1.7m net profit).

Losses from Semua
HOE’s S$4.2m share of losses from its Malaysian associate Semua comprises (i) loss on disposal of a vessel (S$3.4m) and (ii) operating losses (S$0.8m). HOE previously purchased a 49% stake in Semua Group (an owner-operater of oil and chemical tankers) from Malaysia-listed Sumatec Group, for RM35.3m (S$15.1m) in Sep 2010 to diversify its business. However, the operating environment has since worsened and a turnaround is unlikely to happen soon.

Possible consolidation of financials
On 10 May 2012, HOE disclosed that since Semua did not meet the guaranteed RM31m profit for FY11, it has the right to seek compensation either through (i) an issuance of new Sumatec shares, (ii) a transfer of Semua shares held by Sumatec to HOE, or (iii) a combination of the two options. HOE is currently considering its options, and depending on the increase of its effective stake on Semua, there is a possibility that Semua’s financials could be consolidated into HOE in the future. More importantly, this consolidation could have a material impact on HOE’s profitability and balance sheet ratios.

Maintain HOLD with lower fair value
While we are fairly comfortable about HOE’s core business, we remain cautious on its Semua stake. Risks include impairment on its Semua stake and a material impact on HOE’s balance sheet on consolidation. Given the lack of clarity, we lowered our fair value to S$0.20, based on 0.7x P/B. Maintain HOLD.