Hoe Leong

24 Aug 2012

Hoe Leong Corp (HOE) reported a disappointing set of 2Q12 results with net loss of S$1.7m. 2Q revenue and gross profit jumped by 2.0% and 15.9% YoY to S$20.7m and S$6.1m respectively, but the gains were completely wiped out by losses from its associates and JVs of S$2.8m. For 1H12, HOE recorded a net loss of S$2.6m, mainly due to hefty losses from associates and JVs of S$6.1m. The main culprit for the poor performance was HOE’s associate, Semua Group, which continues to be adversely impacted by high bunker prices. There is also a risk that Semua’s financials may be consolidated into HOE, resulting in a material change in HOE’s profitability and balance sheet ratios. Due to a reallocation of resources, we have decided to CEASE COVERAGE on HOE.

Dismal 2Q results
Hoe Leong Corp (HOE) reported a disappointing 2Q12 results with net loss of S$1.7m. 2Q revenue and gross profit jumped by 2.0% and 15.9% YoY to S$20.7m and S$6.1m respectively, but the gains were completely wiped out by losses from its associates and JVs of S$2.8m. For 1H12, HOE recorded a net loss of S$2.6m, also due to hefty losses from associates and JVs of S$6.1m.

Semua Group hit by high bunker prices
The main culprit for the poor performance was HOE’s associate, Semua Group, which accounted for losses of S$2.7m for 2Q12 and S$6.9m for 1H12. Recall that HOE had purchased a 49% stake in Semua from Malaysia-listed Sumatec Group in Sep 2010 to diversify its business. However, the operating environment has since worsened and Semua continues to be adversely impacted by high bunker prices.

Possible consolidation of financials
Another key concern is the clawback feature in HOE’s purchase agreement with Sumatec. Since Semua had not met the guaranteed MYR31m profit for FY11, HOE could 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 still considering its options, and depending on the increase of its effective stake on Semua, there is a risk that Semua’s financial could be consolidated into HOE in the future. More importantly, this could have a material impact on HOE’s profitability and balance sheet ratios.

Cease coverage
Besides the above-mentioned, we also noted the low trading volume of HOE’s shares (which has dropped to a daily average volume of 17k since mid-May and the stock was rarely traded for the large part of the last three months). Due to a reallocation of resources, we have decided to CEASE COVERAGE on HOE.