Stamford Tyres Corp

Uobkayhian on 27 June 2012

Valuation
· Current dividend yield of 5%. The stock is trading at 7.1x FY12 PE, while its dividend yield is maintained at 5%, representing a dividend payout of 36.1%.
Investment Highlights
· Increasing vehicle population in overseas markets. While operations in Singapore contribute 36% of FY12’s revenue, the group maintains their expansion plans in Malaysia, Thailand, India and South Africa. Total vehicle production in South Africa and India grew yoy by 12.8% and 10.7% respectively in 2011. The group will continue to expand their Southeast Asia (SEA) retail business through a partnership with B-Quik in Thailand to supply SSW wheels and other tyres. B-Quik provides vehicles maintenance services through its 100 retail stores. For Malaysia and South Africa, the aim is to increase sales in Falken tyres to dealers.
· Grow with its principals. The group is working with Sumitomo Rubber Industries to expand into new markets with good growth potential, and one of which could be India. The group may need to redevelop their product specifications for this market based on their previous experience in India.
· Sale proceeds of Sumitomo Rubber Industries Tyre Pacific (SRITP) in China. About half of the sales proceeds would be used to expand its South Africa and India operations, while the balance is used to beef up the Singapore warehouse facilities. The group still maintains its local distributorship for Dunlop in Shanghai, Beijing and Guangzhou, but cited problems including difficulties in obtaining credit for business transactions and the protective market for local tyre distributorship in China.
· Falling rubber prices. The group appears to be unable to capitalise on this as tyre manufacturers are slow to cut prices and there is a three months lead time for any adjustments.
Financial Highlights
· Revenue for FY12 grew 6.7% yoy (FY11 grew 10% yoy) to S$364.1m. SEA region, which contributed 75.9% of FY12 revenue, grew by 5.6%. Gross profit rose by a slower 1.1% yoy to S$80.4m due to higher cost of sales, which increased by 8.3%. However operating expenses increased by 7.4% to S$69.3m in FY12 as a result of rising rentals for industrial space in Singapore, as well as FX loss of S$2.9m due to the appreciation of Singapore dollar against South African Rand.
Our View
· We think expanding into retail in SEA is a good move to tap on their existing experience in Singapore and also this could help to forecast their inventory levels and improve margins.
· The group is intending to increase its equity in South Africa to increase its ability to borrow in local currency. However the group is still subjected to FX risk as payables are largely in US dollar and receivables are in respective local currencies. In addition, net gearing appears to be rather high at 113% for FY12. We understand that long-term loans outstanding have increased from S$6.6m to S$24m currently (in FY13) which net gearing is likely to even higher.