Current Price S$0.23
Fair Value S$0.29
Earnings in line with expectation. Asia Enterprise’s (AEH) 2Q13 net profit of S$1.3m was in line with our expectation. Key variances were lower-than-expected revenue and higher taxation but offset by greater-than-expected gross profit margins and forex gain. We keep our earnings estimates and fair value S$0.29, still pegged at 0.9x FY13 PBR. Maintain our Overweight recommendation.
…but outlook still cloudy as we believe the global steel market remains plagued by oversupply. However we see the situation somewhat improving, although supply in the Chinese steel market still overshadows demand. We expect steel pricing will be less volatile, given the improving European debt crisis and the US economic outlook. However the sluggish growth in the emerging markets and potential slowdown in China's economy could be more headwinds for the steel industry.
Singapore still strong in Offshore and Marine despite facing strong competition from China and South Korea. We believe Singapore remains strong in this sector, capturing more than 50% of the world's market contracts on ship conversion to Floating Production Storage and Offloading (FPSO) vessels as well as of jack-up rigs. As at end Jun-2013, both Sembcorp Marine and Keppel Offshore Marine had strong order books of S$14.4bn and S$13.1bn, respectively, with deliveries extending through to 2019.
Despite higher volume shipped, 2Q13 sales decreased by 26% yoy to S$32.2m due to weaker average selling price. Offshore and Marine sector dropped by 24% yoy but remains the largest contributor with 74.8% of total group revenue, Engineering/fabrication (-25% yoy) with 9.3%, follow by Construction (-39.5% yoy) with 7% contribution to group revenue.
Gross profit margins improved by 0.6% pts to 11.2% as the group lowered its weighted average cost of inventory sold. Nevertheless, including higher taxation, pretax and net profit decreased 26% and 31% yoy, respectively.
Balance sheet remains strong. AEH generated a negative free cash flow of S$0.6m after increasing its working capital requirement. Including S$3.4m dividend payout, net cash decreased from S$49m in the previous quarter to S$45m as at end June-2013. (~13 cts net cash per share).